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New IDB study calls for more trade, cooperation between India and Latin America

India could become a fast-growing market for Latin American and Caribbean commodities but governments in this region must foster closer ties with the South Asian giant and reduce trade costs to tap into that opportunity, according to a new study by the Inter-American Development Bank (IDB).

With 1.1 billion people and a scarcity of natural resources, relative to other continent-size nations, India has the potential to be a large buyer of agricultural and mineral goods, Latin America’s main exports, according to the study. Currently, India represents just 0.8 percent of this region’s overall trade, compared with China’s 7.7 percent share.

"India: Latin America’s Next Big Thing?

The book “India: Latin America’s Next Big Thing?,” published by the IDB’s Integration and Trade Department, looks into recent development and economic trends in India and their possible impact for Latin America and the Caribbean. The study argues that India has the potential to mirror the recent economic performance of China, which has become a major market for Latin American and Caribbean exports but also poses a challenge for the region’s manufacturing sector.

“The region and India are increasingly together at the table when major decisions are taken,” IDB President Luis Alberto Moreno said. “We are starting to see greater integration among them and there is a tremendous opportunity for more trade and cooperation. Latin America and the Caribbean are poised to advance confidently into a promising future and India is increasingly interested in being an active partner in that process.”

In order to boost trade, both India and Latin America must lower tariffs and trade barriers, the study concludes. India’s average tariff on Latin American agricultural goods is 65 percent, more than five times China’s 12.5 percent tariff. Even though Latin American tariffs on Indian goods are not as high—reaching 9.8 percent in the case of manufactured products—they are well above the 4 percent to 6 percent OECD range, the study said. A 10 percent reduction in average tariffs imposed on Indian products, for example, would likely increase imports of Indian goods by 36 percent in Chile and Argentina.

Moreover, India and Latin America must reduce transport costs. Currently, India, unlike China, has no direct shipping services to this region. Goods have to be shipped first to Singapore or Europe, which increases both freight rates and shipping times. In the case of Brazil, for instance, shipping a product from Santos directly to Mumbai would take an estimated 27 days and 15 hours. Shipping via Singapore would take approximately 36 days and 18 hours – almost nine days longer.

The book estimates that a 10 percent reduction in freight rates would likely boost imports of Indian goods by as much as 46 percent and 47 percent in Chile and Argentina, respectively.

Investment Flows

Currently, high trade costs are preventing Latin America from reaping full benefits from its current trade with India and undermining the flow of investments between the two regions. Today a 1 percent growth in China’s gross domestic product generates a 2.4 percent increase in this region’s exports to China. Meanwhile, a 1 percent rise in India’s GDP yields just a 1.3 percent growth in the region’s sales to the country.

“There is a policy action that can be taken in the short term: removing most obvious and costly obstacles to trade,’’ said IDB economist Mauricio Moreira Mesquita, who coordinated the study. “As trade brings these two economies together, the investment incentives between India and Latin America and the Caribbean will grow.”

The IDB study also calls for the two regions, which have signed numerous cooperation agreements covering 21 economic sectors in the past decade, to increase opportunities to exchange valuable development and economic lessons.

For example, India can provide important lessons based on its success in creating dynamic information technology services, burgeoning aerospace microfinance and pharmaceutical industries and top-notch universities to train its leaders, just to name a few areas. Latin America, on the other hand, can provide success stories in agriculture, mining, aeronautics, biofuels, private pension schemes and poverty alleviation programs, all of which could help India address some of its economic growth constraints.

Manufacturing challenge

The IDB study also identifies areas in which India could represent a competitive challenge for Latin America. Given the large size of India’s population and the political pressure to reduce poverty, the study argues that the country will likely specialize in labor-intensive manufacturing goods like China.

India has now just a fraction of China’s level of participation in U.S. imports with a market share of 1.7 percent against China’s 22.3 percent in 2008. But India has been expanding its presence at an extraordinary pace, and its share is now bigger than those of Brazil and Central America, Latin America’s second- and third-largest exporters of manufactured goods.

In terms of low-technology goods, India has been boosting exports of textiles and apparel. It has now 3 percent of the U.S. market for these goods, which is twice that of Brazil’s (1.5 percent), higher than Central America’s (2.4 percent), and fast approaching Mexico’s dwindling share (7 percent).

“The manufacturing sector in Latin America and the Caribbean will have to prepare itself for another major competitive shock once India eliminates the barriers that are currently holding back labor-intensive exports,’’ said Moreira. “This scenario just increases the urgency for governments in the region to advance on their reform agenda to boost productivity.”

The study calls on Latin American and Caribbean governments to improve infrastructure, expand access to credit and promote greater and more efficient investments in education, science, and technology. These reforms will allow the region’s manufacturers to take advantage of their relatively large domestic market, the opportunities to process and industrialize natural resources and their proximity to the U.S. market to increase exports.

The study says that Latin America’s manufacturing of medium technology and resource-based goods, such as automotive products, are competitive against India’s, particularly in the U.S. market. It also says that India is likely to become more of a business partner rather than a threat to the region in the areas of information technology and specialized technical and business services.

“Latin America has specialized in niche markets, given its physical and cultural proximity to major IT customers, attracting investment from Indian companies seeking to diversify their business,’’ said Moreira.