CHINA, LATIN AMERICA MUST DIVERSIFY TRADE, DEEPEN COOPERATION AND INVESTMENT, NEW IDB STUDY SAYS

Washington, December 7- China and Latin America and the Caribbean must lower trade costs and increase investment and cooperation to deepen and diversify the trade relationship, according to a new study by the Inter-American Development Bank (IDB).

The report “Ten years after the take-off,” produced by IDB’s the Integration and Trade Department, looks into the evolution of trade, investment and cooperation between China and the Latin America and the Caribbean over the past decade. It argues that policymakers should join forces to cut tariffs, transportation costs and other barriers to diversify the composition of the bilateral trade between China and the region.

Over the past decade, trade between the two regions was built on the sheer complementarity of their resource endowments: China has a scarcity of natural resources while Latin America and the Caribbean has an abundance of these resources. This has led to a classical exchange of commodities for manufacturing goods.

Whereas this type of relationship has brought gains for both sides, it has benefited only a handful of sectors and a limited number of countries in Latin America and the Caribbean. Mining products account for nearly half of the region’s exports to China, followed by agriculture commodities, with a 35 percent share. Approximately 90 percent of the region’s exports to China were coming from just four countries: Brazil (41 percent), Chile (23.1 percent), Argentina (15.9 percent) and Peru (9.3 percent).

“Trade costs are still high enough to constrain trade opportunities on both sides of the relationship and, as such, they call for government action>,” said Mauricio Mesquita Moreira, principal economist of the IDB’s Trade and Integration Sector and the author of the study. ”Both regions also must strengthen investment and cooperation to pave the way for more export diversification and ease any disruptions brought about by greater trade liberalization”.

China found in the region a market for its manufactured products but a large number of countries in Latin America and the Caribbean, particularly those that are not rich in natural resources, are still seeking opportunities to enter the growing Chinese market.

“Even though there is no economic justification for countries to pursue a balanced bilateral trade, these sizeable imbalances can be the source of trade tensions and poison the political economy of the relationship,” said Moreira“. This could eventually lead to more barriers between the two regions in the near future”.

The study says both regions need to reduce tariffs and transport costs to be able to diversify and expand trade. Chinese and Latin American exporters still face double-digit, or very close to double-digit tariffs in everything except mining products despite recent liberalization. Ad-valorem freight rates for Chinese imports into the region can be as high as tariffs, the study said.

The study also calls for a reduction of non-tariff barriers, which are also present on both sides of the relationship. China has made significant progress in removing non-tariff barriers since the country’s entered the World Trade Organization in 2001, but some important restrictions remain, particularly in agriculture for commodities such as wheat, corn, cotton, and sugar.

On the Latin America and Caribbean side, the once favorable and low-restriction trade environment has endured in the smaller and more complementary economies such as Chile, Peru and Costa Rica, which went on to sign trade agreements with China. Yet, this environment has been showing clear signs of deterioration in the larger countries, with more competitive manufacturing interests such as Brazil, Mexico and Argentina. In these cases, there has been a sharp increase in the number of antidumping investigations and non-tariff barriers against Chinese exporters, as well as a growing opposition to granting China the market economy status. Brazil and Argentina have yet to implement their memorandum of understanding with China on this matter, while Mexico and Colombia have yet to grant China such status, the study said.

To deepen the relationship, the study suggests China should have a more diversified investment portfolio in terms of countries and sectors to ease tensions and minimize the social impact of the large inflow of Chinese manufactured products. It also suggests that Latin American companies should set up business in China to be able to open the market for their products and diversify trade.

Cooperation between the two economies should be expanded and strengthened in sectors that can have a direct impact on trade, particularly in customs procedures and technical and sanitary and phytosanitary standards, which could help bring trade costs down and avoid costly disputes. A stronger institutional framework for cooperation, which would have legally binding objectives, could accelerate knowledge sharing between the two regions.

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