, Redacción: Kathia Michalczewsky

How Latin American Exports Are Reacting as Advanced Economies Recover

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Demand is evolving very differently in the United States and the European Union. What impact is this having on the economies of Latin America and the Caribbean?

Exports from Latin America and the Caribbean (LAC) began the year with a sharp upturn that reversed the trend that had characterized the previous four years. According to the Trade Trend Estimates report published by the IDB in May 2017, the region’s foreign sales grew by a noteworthy 17% year-on-year in the first quarter. However, this growth was almost entirely explained by prices, especially commodity prices, while export volumes only grew at low rates. As 2017 has advanced, this impetus has somewhat worn off due to the volatility and instability of some price trends, particularly for oil.

Over the last year, there has been a certain acceleration in the growth of some advanced economies, notably the United States (US) and the European Union (EU). These projections also suggest that it will be the more advanced economies that act as the main source of growth for global GDP in the coming years.[1] Given this outlook, it is worth analyzing how greater demand from these countries could impact LAC exports, based on both their composition and their dynamics in recent years.

This issue will be examined in greater detail in the Trade and Integration Monitor 2017,[2] an annual report that analyzes the current state of LAC’s integration into the global trading system, to be published during the second half of the year.

The Challenges to Gaining Market Share in the Main Developed Countries

LAC is a major supplier to the US: in 2015, 18% of the latter’s total imports, measured in current prices, came from the region. However, two major issues underlie this fact: the first is the importance of Mexico, which explains 13 percentage points (p.p.) of this share; and the second is the fact that the relative stability of LAC’s market share in recent years is actually the result of an increase in imports from Mexico (+2 p.p.), which made up for the downturn in imports from the region’s remaining economies (-2 p.p. between 2007 and 2015).

The US is LAC’s main trade partner: it was the destination market for 42% of exports in 2015, although, once again, this share was strongly biased by Mexico, the largest exporter in the region,[3] which sends three-quarters of its exports to the US. The remaining Latin American economies send 19% of their total exports to the US. Regardless, it is worth underlining that the importance of the US market has shrunk, as in 2015 this share was 12 p.p. lower than was recorded in 2000.

On the other hand, the EU accounted for 12% of the region’s total foreign sales, a share that has remained relatively stable since 2000. However, unlike in the US, LAC does not play a significant role in the EU’s total imports: it accounts for around 2% of these, a figure that has not changed substantially in recent years.[4]

From an aggregate, medium-term perspective, LAC’s export performance on the US and EU markets can thus be said to be not particularly dynamic. There has been no variation in the region’s exports to the EU, while only Mexico has increased its market share of exports to the US.

The structure of US and EU imports from LAC differs from their imports from the rest of the world

Fuels, commodities, and semiprocessed products[5] make up most the basket of exports from LAC (with the exception of Mexico)[6] to these destination markets. In total imports to the US and the EU, machinery and parts and components (M+P&C) are consumer goods are the most significant import categories (figure 1).

Figure 1. Composition of Imports from LAC and Totals for the US and the EU, by Product Category

US

1

EU

2

Source: IDB/INTAL using data from BACI (CEPII)

The main difference between the composition of US and EU imports from LAC and the rest of the world lies in the low share of M+P&C in the former. These account for around 10% of imports from LAC but around 33% of global imports. This points to the region’s limited involvement in manufacturing value chains, which is connected to its factor endowments and the innovation capacities that local economies have accumulated.

The most notable feature of US demand from LAC is the high share of fuels, which was so high in 2007 that it explained almost half of US imports from the region. Although this share had shrunk substantially by 2015, fuels continue to account for a significant proportion of US imports. In 2000, they represented 38% of total imports, while in 2015 this has come down to 28%. This 10-p.p. decrease was made up for by increases in the share of semiprocessed products (+6 p.p.), primary products (+3 p.p.), and consumer goods (+1 p.p.).

The decreasing share of energy products in US external demand is explained by the growth in its domestic supply capability, which is due to the use of unconventional extraction technologies. These have shifted the US toward energy self-sufficiency, to the detriment of oil suppliers, including those in LAC.[1] The increases in the shares of the other important categories mentioned above suggest growth in purchases of commodity-based goods with a greater degree of processing than mere primary products (semiprocessed products), along with consumer goods. Consequently, the decline in the share of oil in LAC’s trade ties with the US has been made up for by the greater share of more processed goods and, to a lesser extent, by commodity exports.

The situation is very different for imports to the EU from LAC (excluding Mexico). First, there have not been such major variations in energy imports as in trade with the US. The most significant changes, however, are related to the decrease in the relative share of more processed goods. M+P&C imports accounted for 12% of the total in 2000, but this dropped to 8% in 2015, while the share of semiprocessed products also dropped from 37% to 33%. The losses from these two categories totaled 8 p.p., which were compensated for by the growth in the relative share of fuels (+3 p.p.), primary products (+3 p.p.), and consumer goods (+2 p.p.).

In other words, in contrast with LAC trade with the US, in this case the structure of demand is moving toward a greater share of unprocessed goods. With regard to M+P&C, the drop in EU demand may be related to the possibility of accessing competitive supplies of these products from within the bloc (above all from new member countries) and, undoubtedly, to products from China and other economies with major flows of labor-intensive manufactures.

It is worth noting that in trade with both the US and the EU, semiprocessed products account for a larger share of the import basket from LAC than from the rest of the world. Indeed, they are the most significant category in LAC exports to the EU, as they represented a third of the total in 2015, and half of the total when combined with exports of primary products. However, LAC exports of semiprocessed products and primary products to the EU are concentrated in just four sectors: soy (beans and soymeal), copper (ore, concentrates, and cathodes), coffee, and chemical wood pulp. US imports of semiprocessed products from LAC also account for a significant amount of total purchases from the region. This share has increased in recent years and now accounts for a quarter of the US total. The supply of semiprocessed products from LAC to the US is relatively more diversified than its supply to the EU, as it includes goods such as metal derivatives and chemical products obtained in the early stages of the different manufacturing chains.

Finally, the high relative share of consumer goods in both US and EU imports from LAC is striking. EU imports in this category are mostly products such as fruit (bananas, pineapples, grapes, and avocados); seafood, fish, and beef; and fruit juices and wine. In contrast, US purchases are not only more diversified in terms of the number of products within each category, but they also include goods from manufacturing value chains, such as apparel. This category has grown by 10 p.p. in US imports from the region.

What do these trends mean for Latin American the Caribbean?

In the current scenario, the behavior of US and EU demand for LAC products may have a significant impact on the region. However, generally speaking, it is good news for the LAC export sector that these developed economies can drive growth in global output, although the implications of this for diversification vary for each partner. In the case of exports to the US, the challenge is twofold and entails, first, maintaining market access conditions, especially for manufacturers; and second, replacing the market share that is opened up by lower oil imports with goods with higher value added. For exports to the EU, the challenges are tougher: the region’s share as a supplier is low and has remained practically unchanged in the last 15 years, despite the commodities boom. Given this outlook, there is a need to make entry requirements for LAC products more flexible and to tackle the factors that determine the high concentration of imports in a handful of low-complexity goods.

 

Classification Annex

Products were classified using the BACI database from the Centre d’études prospectives et d’informations internationales (CEPII) at the 6-digit level of the Harmonized System and converted to the 3-digit level of the Standard International Trade Classification (SITC), and were then reclassified using the groups described in Lemoine and Ünal (2017). This latter classification was adapted in order to analyze the oil export basket separately (all products at the 6-digit level of chapter 27 of the Harmonized System were classified as fuels), and the machinery and parts and components categories were merged. The primary product category contains SITC categories 111 (“food and beverages, primary, mainly for industry”) and 21 (“industrial supplies not elsewhere specified, primary”). The machinery and parts and components (M+P&C) category is made up of SITC categories 41 and 42, which include “parts and accessories of capital goods (except transport equipment),” and categories 53 and 521, which are for “parts and accessories of transport equipment.” Consumer goods are SITC categories 51 and 522, “transport equipment and parts and accessories thereof,” “passenger motor cars,” and “transport equipment, nonindustrial”; 61, 62, and 63, “Consumer goods not elsewhere specified, durable,” “semidurable,” and “nondurable,” respectively; 112, “Food and beverages, primary, mainly for household consumption”; and 122, “Food and beverages, processed, mainly for household consumption.” Semiprocessed products include SITC categories 22, “industrial supplies not elsewhere specified, processed,” and 121, “Food and beverages, processed, mainly for industry.”

References

Giordano, P., (editor). 2014. “Facing Headwinds. Policies to Support a Trade Recovery in the Postcrisis Era.” Trade and Integration Monitor 2014: Washington, DC: Inter-American Development Bank.

Giordano and Ramos. 2016. “Downshifting. Latin America and the Caribbean in the New Normal of Global Trade.” Trade and Integration Monitor 2016: Washington, DC: Inter-American Development Bank.

IMF, 2017. “World Economic Outlook: Gaining Momentum?” April. Washington, DC.

Lemoine, F., and D. Ünal, 2017. “Le décollage du marché des biens de consommation en Chine et son impact sur le commerce mondial.” March. CEPII.

 

[1] See Giordano (2014, 30). and Giordano (2016).

[1] IMF (2017).

[2] See Giordano (ed.), 2016. Earlier versions of this report are available at http://www.iadb.org/en/topics/trade/publications,6302.html

[3] In 2015, 42% of LAC exports originated in Mexico.

[4] Total imports to the EU include intraregional flows.

[5] This analysis was based on the classification used in Lemoine and Ünal (2017), which was adapted to analyze fuels as a separate category (see the annex for more detail).

[6] From this point on, this article focuses its analysis on US and EU demand for goods from LAC, excluding Mexico.

[7] See Giordano (2014, 30). and Giordano (2016).

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