Latin America Requires More International Insertion: CAF

Latin America has shown little progress in its international insertion strategy, reveals a joint report by the Development Bank of Latin America (CAF) and Mexico’s Ministry of Economy. While some countries in the region have achieved significant international insertion, it did not have an aggregate impact on their economies.

Mexico and some Central American countries, such as Costa Rica, have achieved significant productive diversification and a substantial manufacturing component by integrating into the value chains of North American countries. However, these transformations did not have an aggregate impact on the productivity of these economies, whose dynamism did not change substantially, reveals the study. 

The study identified a series of measures that can be implemented in the region to increase the international integration of companies in the trade of goods and services. These include trade facilitation, improvement of physical infrastructure and productive integration. Most of the countries in the region have adopted and implemented trade liberalization policies over the last 30 years, unilaterally, multilaterally and in the context of trade agreements reached within the area and with extra-regional partners. Although these policies have generated increases in trade and investment for the region's average, their results have been relatively modest. 

The North American region was a determining factor in explaining Mexico's dynamism. Since its incorporation into the USMCA, the country has shown great progress in its foreign trade. In 1980, foreign trade represented 24 percent of Mexico’s GDP; by 2019, this number had grown to 77 percent, according to CAF. Central and Latin America had a more moderate increase in foreign trade during that period. Central America’s foreign trade grew from 58 percent to 72 percent, while Latin America’s grew from 52 percent to 62 percent from 1980 to 2019. 

Central America was the only Latin American sub-region to increase its intra-regional trade, which rose from 12.1 percent to 13.9 percent. The lower dynamism of intra-regional trade in Latin America can be partly explained by the lower participation of the region's countries in global value chains, which have a strong regional component. Participation in these production linkages promotes the exchange of intermediate inputs and intra-industry trade, which accelerates as economies specialize and production processes fragment into larger stages.

"It is necessary to strengthen trade relations and make greater integration between nations, the geographical proximity of countries within the Americas makes us obvious partners and expand our markets through economies of scale and specialization to move forward together; globally, we see a reordering of supply chains and a search for greater diversification, Mexico is no exception in this so we have and we want to strengthen and diversify supply chains through investment, capacity building and digitization," said Minister of Economy Tatiana Clouthier during the presentation of the report. CAF recommends simplifying and harmonizing rules of origin and technical requirements to help to further deepen the integration of the rest of the region.