Shipping stuff from Bogota to Beijing or from Santiago to Seoul is much harder than just crossing a big ocean. On one side of the Pacific you have slow ports, subpar roads and costly red tape. On the other, steep tariffs and regulations on higher value-added processed exports.
No wonder then that, for an average Latin American producer exporting to Asia, trade costs add a whopping 287 percent to total costs. For a Chilean seeking to enter the Chinese market, for instance, shipping adds 119 percent in total trade costs. For a Brazilian producer it is 277 percent. This means that if a Brazilian grower can produce a kilo of organic coffee for $1, he will need to sell it in Shanghai for at least $4, just to cover his production and trade-related costs.
This reality can be lost in the mega-numbers of trade growth between Asia and Latin America. Trade flows hit $581 billion last year, a near-record. In 2000, Asia accounted for only one in ten dollars in total trade flows of Latin America and the Caribbean. In 2018 it rose to one in four dollars.
Free Trade Agreements Interactive visualization
All this is good. However, on the flip side, just four products and their derivatives – soybeans, petroleum, iron ore and copper ore – make up more than 50 percent of the region’s total exports to Asia. Asia’s mostly manufactured goods exports to the region are far less concentrated. For instance, China’s top four exports to the region account for only 13 percent of its total.
“This makes sense. Latin America is a resource-abundant region while Asia – and China specifically -- is an industrial powerhouse hungry for raw materials,” said IDB principal trade economist Paolo Giordano. “This dynamic can change. If we do away with export bottlenecks, cross-Pacific trade could rise to its true potential.”
Giordano goes beyond the trade numbers in the latest report, Making the Most of Connectivity: Unlocking the Trade Potential of Latin America and the Caribbean in Asia. In it, he argues that the key to unlocking the true potential lies in a combination of unclogging logistics and some smart trade deals that benefit both continents.
Here’s what research from the Integration and Trade Sector of the IDB shows: reducing trade tariffs, upgrading infrastructure and lowering logistics costs could boost exports from Latin America and the Caribbean to Asia by 28 percent. This is the equivalent to $67 billion in 2019 value, or more than the GDP of Panama.
Asia would also see a big windfall, with its exports to the region growing 41 percent. In fact, the report estimates that Latin American and Caribbean sales to other regions such as the European Union and the United States would also grow thanks to reduced transport and logistics costs that make the region more competitive worldwide.
Reducing trade costs would boost private consumption – a measure of economic welfare – by 1.6 percent and 0.7 percent in Latin America and Caribbean and Asia, respectively. Brazil, Uruguay, and Paraguay stand to gain the most. In Asia, the greatest benefits may accrue to Korea, China, and Singapore.
The surge in trade flows would impact production patterns at the sectoral level. Agri-food sectors emerge as the main potential winners across Latin America and the Caribbean, with Brazil expanding output in agriculture by 4.5 percent. Output expansion may also occur in mining, particularly among members of the Pacific Alliance (4.3 percent) and Brazil (3.8 percent). Central America may grow in manufacturing sectors such as vehicle parts (8.3 percent) and machinery (4.0 percent).
The simulation employed in the report assumes a complete phase-out of all tariffs below 50 percent and a bold reduction of tariff peaks. As a complement of trade liberalization, it factors in a 15 percent reduction in shipping costs, and a cut in logistical inefficiencies.
This is no small task for a region that faces an infrastructure investment gap of around $150 billion a year, but logistics are just one side of the equation. The other is more free trade agreements.
As China’s middle class continues to grow and consumption preferences evolve, the region has an opportunity to export more processed food, in addition to raw materials like soybeans. But China as well as other Asian nations -- and many Latin American countries -- tend to impose higher duties on goods that incorporate greater levels of processing. This means that Latin American countries find it hard to add value to commodity exports.
Latin American producers are also hurt by the process of meeting and proving compliance with regulatory and safety standards to sell in Asian markets, the so-called “non-tariff” barriers. While these sanitary, phytosanitary and technical measures are necessary to protect consumers, they can become an obstacle to trade when exporters are subject to long delays to secure certifications.
To see how free trade agreements help, take the examples of Chile and Peru. Chile and China inked a deal in 2005. Since then bilateral trade has boomed. In the first half of 2018, China was the number one exporter of cars to Chile. And Chile is exporting more refined copper, fresh fruit and wine to China.
Eight years ago, China and Peru signed a free trade agreement. Since then, Peruvian firms have begun to export 548 new products to China, almost entirely in non-traditional sectors such as metal-mechanic, textiles and chemicals.
“We need significant investments to plug our infrastructure gap, and Asia has the capital and the know-how in world class infrastructure. Coupling that with some smart trade agreements and a stringent set of safeguards that ensure financial, social and environmental sustainability would be a win-win for all,” said Giordano.