trade
In the Midst of an
Economic Crisis
Luis de La CaLLe
Seconomy has hit Latin America where it hurts the most: in
harp contraction in the U.S.
shrinking trade volumes. The so-called “vacuum cleaner effect,” or,
the drying up of liquidity resulting
from the collapse in U.S. credit markets, combined with decreased aggregate demand, has affected even
the best-managed economies.
The result is no surprise: falling
trade numbers from around the region. Brazil’s imports in February
2009 fell a whopping 34. 6 percent
and its exports dropped 25. 1 percent year-on-year—a stark contrast
with the 44 percent increase in imports in 2008. In Chile, where lower
copper prices had already flattened
trade in 2008, exports collapsed by
41. 3 percent in January, and imports
shrank by 25. 5 percent. Mexico,
similarly, reported sharp reductions
in total trade at the end of 2008 and
in January 2009.
Lower trade volumes are not limited to Latin America, of course.
They are a global phenomenon that
reflect a fall in demand and the disappearance of trade credit. This
lack of credit has a negative impact
on short-term trade flows, but the
more permanent and damaging effect comes from the lower demand
of developed-country economies.
And while it is hard to make concrete predictions, it is likely that
Latin American economies will suffer more from decreased export volumes and lower export prices than
from reduced imports.
In sharp contrast with the U.S.,
where financial difficulties and de-
leveraging reduce consumption
and investment, the main impact
on many Latin American countries
comes through lowered exports
and reduced foreign direct investment (FDI). The fall in U.S. absorption (consumption and investment) results in a reduction of the
U.S. trade and current account deficits, but in Latin America it produces the opposite: a move toward
a larger current account deficit and
more difficulties in its financing.
This means that in 2009 we can expect to see a sharp decline in Latin
American export earnings either
due to worsening terms-of-trade
for commodity exporters or to significantly lower trade volumes.
Latin American countries will
have to choose from a menu of unappetizing policy measures to deal
with the fall in aggregate demand
and the difficulties in financing
current account deficits. The four
likely choices include: voluntary
reduction of consumption, investment or government spending; involuntary reduction of consumption and investment through
currency depreciations; deployment of international central bank
reserves; and improved country risk profile—through painful
structural reforms—to reverse the
fall in FDI and portfolio investment and avoid a sharp adjustment
in employment and GDP growth.
Trade policy is the key to overcome the crisis. Latin American
countries should defend free trade,
building on the vocal role played
in their opposition to the Buy
American provisions in the original U.S. stimulus proposal. But
with trade concessions unlikely
from the Democratic-controlled
U.S. Congress, Latin Americans
POLICY UPDATE
spring 2009
americas quarterly 97
