Observers are not convinced that the WTO's recent global trade agreement reached in Bali will provide big economic benefits for Latin America. Large countries like Mexico will fare better than smaller ones.
Now that the dust has settled on the recent WTO agreement reached in Bali, many observers are calling into question the long-term significance of the deal, and its effect on regional economies such as those in Latin America.
“I would say the delegates in Bali were relieved,” says Timothy Wise, director of the Research and Policy Program at the Global Development and Environment Institute at Tufts University in Medford, Mass. “It was such an unambitious package to start with, yet still so hard to get through.”
The less-ambitious agenda meant that trade in services and intellectual property were left off the table. What remained was an agreement on trade facilitation, which is essentially a reduction in red tape. That will have some effect on regional trade in Latin America, as well as trade to and from the region, but the impact could be quite modest.
“In Latin America so many countries are middle-income, and active traders,” says Wise, who was present in Bali. “I’m not sure how out of sync their existing practices would be with this WTO agreement, but it could have a significant effect on smaller players like Paraguay, Haiti and some of the Central American countries.”
There is also a risk that smaller and less diversified economies in Latin America will be swamped by imports, Wise notes.
“This was certainly a concern among the least-developed countries in Bali,” says Wise. “The improved movement of goods is not always a good thing if it means you are faced with a surge in cheap imports.”
Mexico in the Mix
But for big Latin American economies like Mexico, forcing customs harmonization could help. Even though Mexico is within the North America Free Trade Agreement (NAFTA), the Institute of the Americas estimates that border and regulatory delays add up to 10 percent to the final product cost of a Mexican product sold in the United States or Canada. Forcing greater customs harmonization could favor Mexico, already in a sweet spot vis a vis global trends.
“Given that Chinese wages are growing and Mexico’s remain suppressed, cost advantages are increasing in Mexico’s favor,” says Kevin Gallagher, a professor at Boston University’s International Relations Department. “I am also optimistic that Mexico will continue to be a coveted destination for higher technology firms to locate. Its locational advantage relative to the U.S. will ensure it.”
Where observers like Gallagher are skeptical with regard to the new WTO deal is in how well regional economies will be able to translate increased economic activity into a higher standard of living for all. Unless there is successful structural reform in everything from taxation to infrastructure, the benefits of a deal could be missed by the person on the street.
“I am pessimistic about Mexico’s ability to translate such investment into economic growth and employment,” says Gallagher. “Per capita income continues to nudge just over one percent per annum as it has for the past 25 years.”
The problem, says Gallagher, is not new. In his 2007 book The Enclave Economy, written with Lyuba Zarsky, Gallagher argued that localized economic development, such as that found in Guadalajara’s Silicon Valley, often does not resonate throughout a wider economy. He adds another warning for Mexico, arguing that, despite Chinese wage inflation and Mexico’s access to the American market, the competition remains fierce.
“Despite cheaper inputs imported from China, Mexico continues to be out-competed by China in the U.S. market, and China is out-competing the U.S. in the Mexican market as well,” he says.
The Importance of Infrastructure
In the case of big regional economies like those in Mexico and Brazil, however, the opportunity exists to leverage the recent developments at the WTO to openly compete against giants like China, the United States and the European Union. The real challenge comes for smaller countries with vulnerable economies and, importantly, weak infrastructure.
“The trade facilitation in the new deal doesn’t reduce tariffs,” says Wise from Tufts. “The intent is simply to standardize procedures. In theory that is good for everyone, but there was no discussion of infrastructure. This is the biggest barrier to trade for foreign countries.”
Anyone who has walked around a port in a poorer country in Latin America can attest to both the importance of infrastructure in trade, as well as the sorry condition of some facilities. Gallagher argues that all the rule changes in the world won’t make much difference unless — and until — the infrastructure question in addressed.
“If you gave someone a refurbished and modern port, that would be a huge boon for trade” he says. “Then the benefits of reduced red tape, and improved customs procedures with computerized systems, could really come to the fore.”
But improved customs procedures cost money, too – something poorer countries noted in Bali. As it stands, major exporters and importers in Latin America are already investing in state-of-the-art systems, while the smaller countries, with fewer resources, are having a harder time of it.
HSBC estimates that 2,700 trade restrictions have been put in place around the world in the past five years. Cutting through that red tape, says the WTO, will result in $1 trillion in savings, with a lot of that accruing to those countries in Latin America that make the investments and get it right. But that $1 trillion incorrectly assumes we live in a world of perfect execution.
“That $1 trillion number assumes that everyone has ramped up their best practices, but a simple agreement can’t do that,” says Wise. “The agreement leaves open the timetable for implementation, which means countries can choose how and when to proceed.”
Timothy Wilson is a Canadian journalist based in Guadalajara, Mexico. He covers business and technology, as well as cultural and political news. Aside from Global Delivery Report, he freelances for the Canadian Broadcasting Corporation and the Globe & Mail, among other outlets. His blog, “La politica es la politica” covers breaking stories from Mexico and Central America. Follow Tim on Twitter @TimothyEWilson.