Non-tariff impediments to trade are increasingly recognized as barriers to integration around the world. RoOs can impose hefty administrative and compliance costs to exporting firms, costs that are aggravated by the fact that there are a growing number of PTAs and each of them establishes its own RoOs. RoOs with full accumulation are those that allow products of one country of a PTA to be further processed or added to products of other countries in the PTA as if they had been produced in the latter.
Thus, they allow firms to use materials from other countries without losing preferential access. Another example of non-tariff impediments to trade are differences in regulatory frameworks, some of which are particularly problematic for the exchange of regionally traded goods and services. In the specific case of electricity, while important steps towards an integrated energy grid have been taken, especially in Central America and Mexico, countries in the region have been unable to fully capitalize on these efforts partly because of conflicting regulatory standards.
In effect, measures based on gravity models suggest that trade in LAC is more sensitive to distance than in other regions. Arguably, LAC needs even better road transport infrastructure than other regions, given its challenging geography. LAC is largely connected to these networks via branch lines as opposed to main lines between hubs , putting it at a disadvantage when it comes to international integration.
This is partly the result of LAC ranking poorly in port efficiency. Aside from trade integration, evidence shows that there could be substantial efficiency gains through better integration of labor and capital markets. Nonetheless, even in these cases the emphasis on trade preferences overshadows the emphasis on factor market integration.
Labor market integration allows workers to flow from low productivity sectors to high productivity sectors, thus allowing for the realization of aggregate efficiency gains. In the case of LAC, there are large and persistent wage differentials between workers of similar characteristics across countries. This could be interpreted as persistent differences in productivity across LAC and therefore implies that there is scope for improving region-wide efficiency through migration.
There is also scope for greater mobility of capital across the region. This is particularly important considering the evidence that knowledge diffusion appears to decay with distance, which puts limits on the positive spillovers from FDI from faraway economies. As with trade, the direct growth dividends from intra-LAC capital flows can be boosted to the extent that LAC firms invest more in innovation and improve managerial practices. Investment agreements can also yield collective efficiency gains through other channels, and, if enacted jointly, can magnify the benefits from global capital integration.
Similarly, regional agreements can facilitate coordination in the provision of incentives to foreign capital among countries in the region and avoid a race to the bottom whereby countries sacrifice revenue as they compete for FDI. As a result, such coordination has the potential to maximize the positive impact of foreign capital across the region. The bottom line is that initiatives such as MILA should be seen as efforts to improve the collective investment climate.
Good Times for Regional Economic Integration
The challenge lies in designing an agenda that is conducive to region-wide efficiency gains by exploiting the complementarities between regional and global integration. Importantly, the ambitious agenda presented in this note should not be seen as a substitute to domestic reforms. After all, evidence suggests that successful global integration is hard to achieve without building a strong neighborhood. Aviso Legal. Administered by: vox lacea. Social policy. Southern Cone.
International economic integration. Economic integration policy.
Common markets. Foreign trade. Trade integration. Subregion - European Union.
Latin American regional organisations - Department of Foreign Affairs and Trade
Association Agreeements. Competing for Market Share in the Digital Era. Inter-American Development Bank. International economy. Export growth. Economic integration. Regional Integration. Business Co-operation. Business Competitiveness. Electronic commerce. Whether such a response will deliver the expected growth dividends is not obvious, however. It will depend on the underlying vision of regional integration and the extent and quality of complementary domestic policies and reforms. Economic theory has long highlighted that the gains from trade depend on the characteristics of trading partners.
The gains predicted by neo-classical models are greatest when trade occurs between structurally different economies.
Learning models suggest that dynamic gains from trade i. Why, then, pursue an OR agenda? The short answer is that the economic benefits of regional and global integration are intertwined. In particular, since the flows of goods, services, labor and capital, as well as economic performance more generally, are geographically clustered, neighboring economies have to strive to make the best of their neighborhood in order to enhance their global competitiveness.
Deeper Integration Vital for Growth in Latin America and the Caribbean, World Bank Report Says
By enhancing the scope for trading in these goods and services, regional integration can generate benefits equivalent to the gains from global integration. Notable examples include electricity and land transportation, which are key inputs in other economic activities. Similar arguments can be made about labor markets. Migration decisions are shaped by the costs workers face in order to move and successfully adapt to another country.
These costs arguably increase with distance, both spatial and cultural. Geographic proximity, coupled with cultural affinities among neighboring countries, facilitate growth-promoting flows of labor, particularly where skill complementarities exist. Additionally, new evidence that documents significant persistence in wage differentials between countries in LAC suggests that there is scope for achieving region-wide efficiency improvements by enhancing intra-regional labor mobility.
The geographic clustering of trade also implies that economies can seize learning opportunities from nearby countries. Both of these suggest that LAC countries are better off integrating amongst themselves as well as with the rest of the world. Since the s, with varying timing and intensities, LAC has been pursuing a global integration agenda. Consistent with the notion of OR, this was typically done through a combination of unilateral trade liberalization and free trade agreements, especially with neighboring countries.
The early momentum from the s, however, has slowed in some countries and stalled in others. Moreover, insufficient attention has been given to reform efforts that seek to lower non-tariff barriers to trade and to integrate Latin American factor markets. The rest of this note illustrates what could be done going forward in the five areas that constitute the proposed renewal. Further reductions in MFN tariffs would result in a more collectively open LAC, which, as mentioned, can facilitate entry into global export markets for countries in the region, especially to the extent that they can learn from the experiences of their regional partners.
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Reducing this overhang can stimulate local economic activity and attract foreign investment. There are clear divisions within the region in terms of tariff preferences granted to regional partners. For example, the group of countries comprised by Bolivia, Ecuador, and the members of Mercosur, provide each other with fairly universal coverage of bilateral tariff preferences, but similar preferences are typically not granted to other countries in the region.
Hence there is scope for additional preferential trade agreements PTAs , especially between countries in South America and those in Central and North America, because these are precisely the countries in LAC that present the largest differences in terms of their patterns of net exports which indicates there may be substantial benefits from trade between these countries.