The evolution of trade treaties and trade creation : lessons for Latin America

The author examines the main distinction between trade liberalization under the General Agreement on Tariffs andTrade (GATT) and under regional trading agreements. Under the GATT, trade liberalization is based on the most-favored-nation principle. Under regional trade agreements, it is based on preferential trade. Establishing regional trade agreements does not necessarily lead to greater regional integration. The European Economic Community has been an exception, and with greater integration, regional trade has grown steadily. The Association of South East Asian Nations (ASEAN) has been a weak association, but trade among ASEAN members has increased rapidly because member countries have undertaken multilateral trade liberalization. The efforts of Latin American countries to create regional trade associations in the 1960s, based on protectionist policies, reduced trade not only regionally, but with the rest of the world. In contrast, the Latin American regional trading agreements of the 1980s and 1990s have liberalized trade among the groups. Proper regional trading agreements must conform to Article XXIV of the GATT, but nearly all the countries that have created regional integration schemes have not followed it. These regional trading agreements have not increased protection, but neither has there been across-the-board trade liberalization. Regional trading agreements carry with them the danger of trade diversion (when imports that used to come from third countries at lower prices become costlier because of preferential access granted to a higher-cost regional source). How can Latin American countries reduce trade diversion in their regional trading agreements? : 1) keep protection low in the first place; 2) have open regional trade associations (so that it is easy for new partners to join); 3) continue liberalizing trade with the rest of the world, following the most-favored-nation principle; 4) establish common markets rather than free trade areas (because rules of origin create new barriers, including bureaucracies); 5) coordinate regulatory and competition policies (eliminate laws that limit competition and adopt common external tariffs); and 6) improve roads, ports, and means of communications.TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Trade and Regional Integration,Trade Policy,Economic Theory&Research,Environmental Economics&Policies

Post trade liberalization policy and institutional challenges in Latin America and the Caribbean

Argentina, Chile, Colombia, Jamaica, Trinidad and Tobago, and Uruguay undertook extensive trade reform at a time of crisis, at which time institutional reform was difficult to undertake. Many of the countries had become members of the General Agreement on Tariffs and Trade (GATT) in the late 1980s and anticipated institutional reform. Only later did they reform trade policymaking institutions to bring them somewhat in line with trade policy regimes and GATT rules. These countries have all used reference prices and antidumping provisions of GATT, rather than safeguards, to provide relief from import surges. They have all tried to centralize trade policy by moving it from different agencies into a single agency. Despite liberalization, some sectors -- including automobiles, textiles and agriculture -- remain protected. Lessons the author draws from experience in these coutries: 1) the deteriorating macroeconomic situations are the main challenge to maintaining open trade policy; 2) trade policymaking must be constantly reviewed to prevent reversals, and the costs of protection must be communicated to the public at large; 3) There must be short-run measures to help domestic activities adjust to short-run price movements and alleviate pressure for protection. The danger -- such measures (unrelated to long-run price trends) can become permanent. 4) external commitments (through WTO or customs unions) can be used to discourage a return to protection; 5) extending reform (to labor and capital markets and the regulatory framework) will help maintain and extend trade liberalization. Allowing factors of production to move smoothly from one activity to another could help prevent the buildup of pressures that lead to protection; 6) an institution to consider exceptional protection should be advisory (independent of day-to-day trade policymaking), so that it works steadily, free from administrative pressures and exigencies. Requests for protection must be handled openly and transparently, with the findings subject to public scrutiny. Procedures for granting relief through safeguards and similar mechanisms must reflect all interests, including those of consumers, exporters, and users of the product; and 7) the analysis to establish injury must conform to high technical standards. The criteria to consider trade policies must reflect national interests, not those of any particular sector.Economic Theory&Research,Common Carriers Industry,Trade Policy,Environmental Economics&Policies,Payment Systems&Infrastructure,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Trade Policy,Environmental Economics&Policies,Transport and Trade Logistics

Trade policies, macroeconomic adjustment, and manufactured exports : the Latin American experience

The author examines the relationship between trade policies and macroeconomic adjustment in six Latin American countries: Argentina, Brazil, Chile, Colombia, Costa Rica and Mexico. For the period 1965-94, the six countries experienced 26 trade policy episodes: 11 tightening, and 15 loosening of trade policies. For the analysis, the author worked with four periods that coincided with diffreent prevailing exchange rate regimes: 1965-73, 1974-79, 1980-83 and 1984-04. Using a probit model, he examined the relationship between tightening and loosening trade policies and the current account balance, the exchange rate, and the growth in manufactured exports. His main conclusions: 1) experience in these six countries for 1965-94 confirmed the hypothesis that trade restrictions cannot solve current account problems; 2) for trade liberalization to work, there must be real devaluation either before or during liberalization. Reluctance to devalue, for one reason or another, may lead to trade restrictions. There is evidence that trade restrictions were used in lieu of devaluations during 1965-83. In 1984-94, however, the reluctance to devalue was overcome; 3) growth in manufactured exports helps maintain trade reform and release the economy from foreign exchange constraints. As expected, trade liberalization improved exports (liberalization reduces the bias against exports) while trade tightening hurt them; and 4) The impact of trade reform on the fiscal system cannot be predicted because tax revenues can go in either direction depending on initial conditions, the elasticity of supply in importable and exportable sectors, and the economy's growth rate.Environmental Economics&Policies,Economic Theory&Research,Trade Policy,Payment Systems&Infrastructure,Rules of Origin,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Economic Theory&Research,Environmental Economics&Policies,Trade Policy,Economic Stabilization

The domestic financial market and the trade liberalization outcome : the evidence from Sri Lanka

The authors developed a framework for analyzing the relationship between domestic financial markets and the effects of trade liberalization and applied it to Sri Lanka's experience between 1977 and 1987. They found that the domestic financial market significantly affects the outcome of trade liberalization. Because Sri Lanka deregulated its interest rates when it undertook the trade liberalization, this allowed those earning more from trade liberalization to hold financial assets rather than nontradables. The availability of savings and time deposits at attractive interest rates prevented the premature appreciation of the exchange rate, thus helping to maintain the competitiveness stimulated by trade liberalization. By reforming interest rates, removing credit ceilings, and increasing competition among banks, Sri Lanka helped increase private sector savings - which could be reallocated to the tradable sector. Unlike earlier studies on financial reform in Sri Lanka, this one finds that financial reforms have increased private savings in financial institutions, raised economywide financial intermediation ratios, and expanded credit to the private sector. More important, the authors find a statistically significant relationship between the financial intermediation ratio and the real exchange rate.Banks&Banking Reform,Financial Intermediation,Insurance&Risk Mitigation,Economic Theory&Research,Environmental Economics&Policies

Total strangers or soul mates? - antidumping and competition policies in Latin America and the Caribbean

As a result of trade reforms in the 1980s and 1990s Latin American and Caribbean countries became more open than at any time since World War II. However, these countries have recently begun to use antidumping measures as the new protection weapon of choice, as other barriers to trade have been reduced. In fact, the fastest growing antidumping actions are within regional integration arrangements, where they are being applied by member countries against each other. The authors argue that antidumping is anticompetitive and that its usual justification as a counter to predatory behavior is not relevant in the region. It is imperative, they say, that antidumping be contained if not altogether eliminated. While they find that safeguards are less anticompetitive than antidumping, they believe that all exceptional protection measures, such as antidumping, countervailing, and safeguards, should be considered together with competition policies. In other words, they should become soul mates rather than remain total strangers. The authors do not find that fine-tuning antidumping policy is a good option. Rather, they believe that both trade and competition policymaking ought to be brought under a single entity, as in Peru. This would lead to a more competitive solution.Decentralization,Environmental Economics&Policies,Economic Theory&Research,Labor Policies,Markets and Market Access,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Environmental Economics&Policies,Economic Theory&Research,Trade and Regional Integration,Access to Markets

The interface of trade, investment, and competition policies : issues and challenges for Latin America

Latin American countries have not had much experience with competition policy. Restricted trade policies, together with no competition policy, have often resulted in domestic monopolies. Trade liberalization in the 1980s and 1990s has strengthened import competition, but trade policies alone cannot create a competitive economic environment. Trade policy as an instrument of competition policy (limited as it has been) has been constrained by a disproportionate amount of nontraded goods, vertical integration, and distribution monopolies -- and sometimes the use of antidumping, countervailing, and safeguard measures. Competition policies -- such as antitrust laws, merger controls, and other regulatory measures -- can prevent exclusionary practices, collusion among competitors, and the abuse of market power. Allowing foreign ownership and liberalized investment regimes will further enhance domestic competition by adding market presence. The authors contend that trade and competition policies must complement each other and that when they do, welfare improves. Tensions between the policy areas arise because of globalization, regional policies, technical barriers, certain kinds of industrial policy, and macroeconomic exigencies. Trade policy itself can be used for protection even without high tariffs or quantitative restrictions. Antidumping, countervailing, and safeguard measures limit rather than promote competition. These measures -- which should be GATT-compatible by law and competition-promoting in spirit -- must be used judiciously. The authors favor the use of safeguards rather than other measures to provide temporary protection for firms facing import surges. Latin American countries have recently made impressive strides in trade reform, but have made limited use of competition policies. The authors argue for more use of competition policies to enhance gains from trade reform. They also argue for harmonization of competition policies as these countries reduce barriers against each other through regional agreements. More efforts should be made to: 1) create favorable competitive environments; 2) harmonize trade, regulatory, and competition policies as well as conflict resolution mechanisms; and 3) strengthen enforcement mechanisms and make them binding.Trade and Regional Integration,ICT Policy and Strategies,Environmental Economics&Policies,Economic Theory&Research,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT

Capital inflows and the real exchange rate: a comparative study of Asia and Latin America

The nexus of real exchange rate (RER) and capital inflows is examined through a comparative analysis of the experiences of emerging market economies in Asian and Latin America during the period 1985-2000. It is found that the degree of appreciation in RER associated with capital inflow is uniformly much higher in Latin American countries compared to their Asian counterparts, despite the fact that the latter experienced far greater foreign capital inflows relative to the size of the economy. The econometric evidence suggests that both the composition of capital flows and differences in the degree of response of RER to capital flows matter in explaining these contrasting experiences. While RER appreciation is a phenomenon predominantly associated with other (non-FDI) forms of capital inflows (OCFW), a given level of OCFW brings about a far greater degree of appreciation of the real exchange rate in Latin America where the importance of these flows in total capital inflow is also far greater. On the policy front, Asian countries seem to have used fiscal contraction and nominal exchange rate adjustment more effectively to cushion the RER against the appreciation pressure of capital inflows. There is, however, no evidence to suggest that sterilized intervention can generate a lasting impact on the real exchange rate

The Evolution of Trade Treaties and Trade Creation: Lessons for Latin America

This paper examines the main distinctions between the General Agreement on Tariffs and Trade (GATT) and regional trading arrangements (RTAs), noting that under the former, liberalization of trade is based on the most favored nation (MFN) principle, while under the latter, there is a departure from that principle leading to preferential trade liberalization. Properly instituted RTAs must confirm to Article XXIV of the GATT. But the article has not been followed by nearly all the countries that have created regional integration schemes. This has meant that while the integration schemes for the 1980s and 1990s have not lead to increased protection against third countries, there has not been across the board trade liberalization among the groups forming RTAs. Developing countries have sought and received formal exemption from Article XXIV through the enabling clause at the Tokyo round. Departures from the MFN principle and Article XXIV have meant that there is potential for greater trade diversion with the proliferation of RTAs. The paper finds that there is no general tendency for RTAs to become increasingly integrated entities. The European Economic Community has been an exception, where greater integration has taken place with trade within the region growing steadily. In contrast, the Association of South East Asian nations (ASEAN) has been a loose agreement. Nevertheless, trade among the group has increased rapidly on the basis of multilateral trade liberalization undertaken by the countries in the group. Latin American countries also attempted to create RTAs in the 1960s based on their national protectionist policies which led to reduced trade within the regional as well as the rest of the world. RTAs carry with them the danger of trade diversion and that there is no inexorable logic that RTAs would lead to increased integration with lower protection. Countries venturing into RTAs must attempt to achieve GATT-plus trade liberalization, implying that RTAs are used to have greater trade liberalization than what could be achieved through GATT based trade. The lessons for Latin America to avoid unnecessary costs of these RTAs arising from trade diversion are to have low protection in the first place, to have open RTAs so that there is easy accession of new partners, to continue with the trade liberalization on a MFN basis, to avoid free trade areas (in preference for common markets) which could lead to new barriers through rules of origin and to coordinate regulatory and competition policies as well as to remove barriers arising from transport, ports and communications.