Latin America: Expanding Trade Opportunities

Publisher’s Note

During the last decade Latin America has undergone a profound political and economic transformation. In addition to the nearly complete transition to democracy, the region now boasts an unprecedented level of economic openness and cooperation. These changes have been the result of a three-tiered strategy. First, countries have moved toward unilateral liberalization over the past decade. Second, the Latin American and Caribbean countries have established regional trade and integration arrangements. Third, the countries of the region have created new and dynamic multilateral commitments. Within the context of increased macroeconomic and political stability, and with this new attitude toward commercial relations, Latin Americans have begun to prosper from increased regional and global trade.

In the mid-1980s, as a complement to the stringent macroeconomic reform policies adopted to address the international debt crisis, Latin American countries moved away from protectionist policies. They opened their economies, reduced trade barriers, and implemented export promotion strategies. Unilateral trade liberalization, carried out by reducing and simplifying tariffs and largely eliminating non-tariff barriers, created a positive environment for trade and investment growth. Trade policy liberalization was part of a larger outward-oriented development strategy which replaced the former import substitution approach.

These new trade policies enabled Latin American countries to advance their regional economic integration goals and participate more intensely in multilateral initiatives such as the General Agreement on Tariffs and Trade (GATT). The GATT Uruguay Round negotiations, launched in 1986, occurred while most Latin countries attempted to recover from the debt crisis. They actively participated in these negotiations because they viewed the multilateral agenda as a means to consolidate their recent domestic reforms and strengthen their engagement in the world economy. The multilateral commitments undertaken during these negotiations have reinforced the unilateral liberalization measures implemented in the region.

This paper focuses on the second tier of trade liberalization, the one carried out at the regional level. Regionalism has resurfaced in Latin America and the Caribbean over the past few years as new trade and integration arrangements have been formed and existing ones reformulated. This renewed trend toward regional integration has disturbed some analysts. Many recent papers nervously warn of potential welfare reductions, cautioning that regional arrangements lead to protectionism and distract policymakers from furthering the multilateral agenda. They see the drive towards regionalism as potentially eroding the multilateral trading system.

These concerns should be considered seriously. In classical trade theory, the economic benefit of joining a preferential trading agreement is ambiguous. A regional arrangement is trade creating and thus welfare enhancing if it leads to the replacement of high-cost domestic production with cheaper imports from trade bloc partners. If, on the other hand, the regional arrangement leads to the replacement of lower-priced imports from non-member countries by higher-priced imports from a member country, the arrangement diverts trade and causes undesirable welfare consequences. To avoid potential trade diversion, many economists favor nondiscriminatory tariff reductions, granted on a most-favored nation (MFN) basis, to reach the optimal goal of global free trade. These economists argue that even regional arrangements which create trade are merely a second-best option for countries, and that policymakers should concentrate instead on furthering the multilateral agenda of global free trade. Lowering barriers to all trading partners will ultimately net the greatest economic gains.

This optimal scenario, however, is not yet a possibility. The GATT/World Trade Organization (WTO), after all, does not itself include all countries of the world. Trade barriers remain in developed and developing countries. Regional arrangements are undeniable features of the current economic landscape, and they have grown in importance in the Latin American region. The harmful effect of these arrangements on the international system, however, is not necessarily substantiated by Latin America’s current regional experience. In this paper we reflect on the resurgence of Latin American regionalism and explain why this current trend is not detrimental to, but rather an important component of, the region’s overall liberalization strategy. Moreover, these arrangements have largely adopted the standards set forth by the World Trade Organization (WTO) as a basis...