Asian Opportunities Diversification Strategies 1228137644574019 9

Asian Opportunities and
Diversification Strategies:
An Outlook for
Latin American Trade
Javier Santiso
Rolando Avendano

OECD Development Centre

WWW.OECD.ORG/DEV

Conference on China and Latin America:
Growing Economic Relations and
Commonalities in Policy Issues 1st December 2008 – Hong Kong, China

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.


Emerging economies have become major
actors in mobilising capital

Note: Emerging countries refer to Latin American and Asian only.

Source: OECD Development Centre 2008, based on Thomson Datastream (Economist Intelligence Unit).


Myth I: The main source of China’s competitive
advantage is cheap labour

Fixed Capital Investments in China as % of GDP
and Return to Capital (1980-2006)
Investment in China Return to Capital before and after taxes
60
Investment in Fixed Assets 60 Base case
50 Excluding urban residential housing, including inventories, before taxes
Gross fixed capital formation 50
Excluding urban residential housing, including inventories, after taxes
40
Percent of GDP

40

Percent a year
30
30
20
20

10
10

0 0
1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

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 flows
to other emerging markets

Inward FDI Flows Outward FDI Flows
USD Millions USD Millions
China China
60000 Latin America 1400000
Latin America
Africa Africa
50000 Developing countries (right axis) 1200000
100000 Developing countries (right axis) 400000
90000 1000000
350000 40000
80000
300000 800000
70000
250000 30000
60000
600000
50000 200000
20000
40000 150000 400000
30000
100000 10000
20000 200000
10000 50000
0 0 0 0
Avg. 1990‐ 2003 2004 2005 2006 Avg. 1990‐ 2003 2004 2005 2006
2000 2000

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 Commodities

Oil
100 Agriculture & other
90
80
% of country's exports

70
60
50
40
30
20
10
0
Venezuela Chile Peru Argentina Colombia Brazil Latin Mexico
America

Source: OECD Development Centre, 2008. Based on: National Balance of Payments, 2006.


The rise of China concerns all the region
Descriptive Statistics on Trade for Selected Countries

Share in Share of
Exports Trade
Latin Exports to
Goods- Restrictiveness
Country America Asian Drivers Main Exports
Services Index
GDP (%) (Avg. 2000-
as % of GDP (WB-OTRI 2005)
2006 in PPP 2006)
Animal feed, fixed veg.
Argentina 12.8 23.6 9.7 22.8 oils/fats, soft, heavy petrol, oil
crude, oil seeds
Iron ore, oil seeds, meat,
Brazil 34.1 14.5 6.8 30.1 passenger cars, petrol/bitum.,
sugar
Copper, metal ore, fish,
Chile 4.0 39.6 11.5 14.2
fruit/nuts, pulp, wood
Petrol, coal, coffee, heavy
Colombia 7.7 21.1 0.9 25.3
petrol, crude materials, iron
Petrol, passenger cars,
Mexico 23.2 29.7 0.7 32.0 telecomms. equipment,
computer equipment
Metal ore, copper, heavy
Peru 3.7 21.4 9.9 21.0
petrol, animal feed, silver
Venezuela 4.0 32.9 0.2 21.8 Petrol, iron, aluminium

Source: Economist Intelligence Unit.


Increased Asian exports have been
met with apprehension in Latin America

Latin American tariffs to China and the
rest of the World
Manufactured goods (SITC 6)
World
19.00
China
17.00
15.00

%
13.00
11.00
9.00
7.00
5.00
2000 2001 2002 2003 2004 2005 2006
Note: Does not include NTB data.
Source: Latinobarómetro survey. Santiago de Chile, 2007. Source: TRAINS Database (World Integrated Trade Solution),
Nomenclature STIC Revision 3, 2008.


Export competition with China is relatively low,
although Mexico is on the spot
Export Competition with China for selected countries (2000-06)
0.8
High compet.

0.7
0.6
0.5
0.4
0.3
Low compet.

0.2
0.1
0.0
Czech…

Slovak…

Russian…
Thailand

Malaysia

Chile
Hungary
Korea, Rep.

Bolivia
Croatia

Colombia

Honduras
Singapore
Romania

Bulgaria

Spain

Uruguay
Poland

Panama
Mexico

Indonesia

Philippines

Japan
India

Pakistan
Brazil
El Salvador

Guatemala
Argentina
Peru

Venezuela
Paraguay
United States

Turkey

Costa Rica
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
Export Competition with India for selected countries (2000-06)
High compet.

0.8
0.7
0.6
0.5
0.4
0.3
Low compet.

0.2
0.1
0.0

Russian…
Slovak Republic
Bulgaria

Thailand

Colombia

Singapore

Chile
Romania

Poland

Malaysia

Bolivia
Pakistan

Croatia

Spain

Korea, Rep.

Hungary

Panama

Japan
Brazil
Czech Republic

Mexico

Guatemala

Philippines
Turkey

Costa Rica
Peru

Paraguay
Honduras
Indonesia
El Salvador

Argentina

Uruguay

Venezuela
United States

Note: CS and CC coefficients calculated with exports of country i and exports of country j (China, India).



Trade complementarities with China
remain unexplored today…
Trade Opportunities with China for selected countries (2000‐06)
High compet.

0.8
0.7
0.6
0.5
0.4
0.3
Low compet.

0.2
0.1
0.0
Korea, Rep.

Chile
Thailand

China

Romania
Bulgaria

India

Uruguay
Bolivia
Malaysia

Panama
Japan

Philippines
Indonesia

Hungary

Spain
Poland

Croatia
Mexico

Czech Republic

Argentina

Slovak Republic

Turkey

Peru

Pakistan
Brazil
Colombia

Honduras
United States

Singapore

Venezuela

Guatemala
El Salvador

Paraguay
Costa Rica
Russian Federation

Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).



Major economies in the region have a lot to
win from increasing trade with Indian partners
Trade Opportunities with India for selected countries (2000‐06)
0.8
High compet.

0.7
0.6
0.5
0.4
0.3
Low compet.

0.2
0.1
0.0
China

Thailand

Chile
Malaysia

Korea, Rep.

Bolivia

Hungary
Croatia
Slovak Republic

Uruguay
Brazil
Colombia

Singapore

Bulgaria

Romania

Honduras
Argentina

Japan

Poland
Spain

Philippines
Venezuela

Indonesia

Mexico

Peru

Guatemala

Czech Republic

Panama
Turkey
Costa Rica

El Salvador

Pakistan

Paraguay
United States
Russian Federation

Note: Modified CS and CC coefficients calculated with exports of country i and imports of country j (China, India).



In which sector is Latin America specialised?
Let’s not forget intra‐industry trade
Vollrath's Relative Comparative Advantage Index Latin America (2005-2006)

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

n.e.s. = not elsewhere specified.
Note: Positive values of the index reveals a comparative advantage, whereas a negative indicates a comparative disadvantage.
Source: OECD Development Centre, based on WITS Database, SITC Revision 3 (three‐digit classification) 2008.


China and India’s increasing demand can
have adverse effects

Increasing commodities prices Rise in mineral exports from Latin America
(1900‐2005) (1998‐2005)

2000
Aluminium Coffee Petroleum and products (left)
120 000 Copper ores/concentrates (right) 10 000
Copper Petroleum

$ millions .
Price index (1970=100)

1600
Nickel ores/concs/etc (right)
100 000
8 000

$ millions
.
1200 80 000
6 000
60 000
800
4 000
40 000
400 2 000
20 000

0 0 0

1998

1999

2000

2001

2002

2003

2004

2005
1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000



The rise of China and India is also a challenge
against product specialisation

Export Concentration in Products for Latin America
Herfindahl Hirschman Index

0.9
2001 2006
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
ru

M xico
y
hile

G na
V ne la

E dor

s
na a

bia
ra y

ua m la
Costa ica
olivia

B zil
rugua
ondura
Pa m

Pa gua
e zue

Pe

G te a

ra
uya

olom

R
cua

C

e
B

U
H

C
⎛ n 2 1⎞
⎜∑ p j − ⎟
⎜ n⎟
Note: Herfindahl-Hirschmann index calculated as HH = ⎝ ⎠
j =1

1
1−
n
, where p j = x ij / X irepresents the market share of country j on the exports of country i in its total exports .

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 Africa
Herfindahl Hirschman Index

1.0
0.9
2000 2005
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0

o cco
u frica
Ke ya
A g la

C m ro n
hd

ô d ire

Z bb e
o m iq e
o g

lg ria

Gaa
ig r
ig ria

G m ia
m ia

ngl
N m ia

u isia
M li

Se e a
Ne
Cno

im a w
Ca

a e o
M za b u

hn
a
no

a b
Za b

a ib

n
A e

C te 'Ivo
Ne

M ro
Tn
So th A
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

Time for exports Cost to exports

2000
40

$ per container
35
1600
30

25 1200
Days

20
800
15

10
400
5

0 0

India

China
Peru
Argentina

Mexico

Venezuela
Colombia

Chile
Brazil
Average LAC
India

China
Venezuela

Peru
Colombia

Chile

Mexico

Argentina
Average LAC

Brazil

Source: Doing Business Report. World Bank, 2007.


…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 recherches
Internationales (CERI). 2008.


A wake up for reforms:
The proximity to export markets
Mexico benefits from its geographic proximity to its major export markets:

• Lower transport and
communication costs
11,700 Km
• Access to FTA 24 Days 4 Days
160 Km
• Just‐in‐time delivery
Shipping time


Mexico: competition in third
markets is more fierce

Share of US imports by region

Mexico China
Three key issues:
25

Japan EU • Infrastructure investment
20
% of total imports

• Private participation
15

• Regulation and transparency
10

5

0
1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: CEPAL (2006) and World Integraded Trade Solution.


Opportunities have emerged as a result of
Increased trade with China

High value‐added niche to achieve global scale Products with high volatility and customization needs

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.


Latin American companies have started to
adapt to new value chains
Upstream value chain integration

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.


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


Following the Chinese example: can
Latin America count on fiscal leverage?
The Capacity to Generate Fiscal Surpluses…

11

9 1995 2000 2006
7

5
% of GDP

3

1

‐1

‐3

‐5
China Colombia Ecuador Peru Argentina Brazil Chile Mexico Uruguay Venezuela

Source: OECD Development Centre (2008); Based on ECLAC and Statistical Yearbook for Asia and the Pacific 2008.


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

Intra regional Exports as a share of Total Exports
By region

30.0% Eastern Europe East Asia and Pacific Africa Latin America

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005
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



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Asian Opportunities Diversification Strategies 1228137644574019 9

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