How to Protect
and Defend Free Trade
A Five-Step Strategy
By José Guilherme Reis and Thomas Farole
The expansion of global trade in recent decades has contributed signif- icantly to economic growth and poverty reduction throughout the Western Hemisphere. Fueling this trade expansion were two major structural changes in the global economy: the globalization of manufacturing processes and an unprecedented increase in the trade of services
and outsourcing across borders. With the onset of the global economic crisis, however, global trade rapidly contracted by 36 percent, unemployment
in many countries skyrocketed, and the prospect of protectionism returned
to haunt high-income economies.
A decade of good fiscal management, strong commodity prices, growing
foreign investment, and increased trade links with Asia left most countries
in the region in a strong position to weather the crisis. The responses of most
governments, which included both fiscal stimulus and monetary measures,
have meant that on the whole Latin America and the Caribbean have fared
relatively well in this latest downturn. The economic crisis and its aftermath
may be raising doubts in some circles about the export-led growth strategies of recent decades. Instead, the governments of the Americas should focus on finding ways to maximize the benefits from trade and foreign direct
investment while minimizing the downside risks.
Following is a suggested agenda for strengthening trade strategies:
and 2008.1 And their import demand
has remained much stronger during
the crisis. A recent analysis of exports
from Southern Africa, for example,
showed that reliance on traditional
OECD markets would have kept 2010
exports down 35 percent from their
2008 levels. Instead, a major shift in
exports to China and other markets
in the global “South” helped exports
recover to more than 80 percent of
their precrisis levels.
Diversify Exports
Diversification of exports is a
potent buffer against global
economic volatility. Countries
that rely heavily on a limited
number of exports are fully exposed to external price shocks.
This is true not only for oil, natural
gas and minerals exporters, but also
for economies reliant on areas such
as tourism and agriculture. The sta-
bility and growth of several countries
in the region have been supported by
a rapid diversification of exports over
the last 20 years. Nicaragua, Colom-
bia and Mexico shifted from a reli-
ance on narrow natural resources
exports (principally coffee and/or oil)
to a wider range of agricultural prod-
ucts and, critically, light manufactur-
ing. The next step in the diversification
agenda needs to go beyond manufac-
turing. Many countries now focus on
services, including financial and pro-
fessional services as well as transpor-
tation and tourism. Indeed, while
trade in goods collapsed during the
crisis, trade in services remained ro-
bust.
Diversify Markets
Diversification of trading part-
ners is the other side of the
coin. The more trading part-
ners countries have, the less
exposed they are to any single
partner. Given the outlook for
prolonged, slow growth in the tradi-
tional, high-income export markets
of Europe, Japan and the United
States, a critical element of any devel-
oping country’s diversification strat-
egy will be in “South-South” trade,
taking advantage of higher growth
in many middle-income countries
(e.g., Brazil, Russia, India, and China).
The share of global imports of these
BRIC countries nearly doubled (from
9 percent to 17 percent) between 1996
If You Build It,
They Will... Trade
Government policies can create the conditions that push
the private sector to better respond to market opportunities. One of the most effective
ways to do this is to improve
producers’ access to markets. Labor
costs and productivity are critical determinants of competitiveness, but
the benefits of low labor costs and
high worker productivity stop at the
factory or farm gate. For exporters in
much of Latin America, the great distances between modes of production
and export markets erode their competitive advantages. Controllable factors like transportation and
communications infrastructure, bureaucratic red-tape, and local logistics play a critical role in shaping
exporters’ competitiveness through
their impact on production costs,
time and the reliability of supply
chains. Data from the World Bank’s
Logistics Performance Index (LPI),
published in 2010, show that for countries at the same level of per-capita
income, those with the best logistics
performance experience faster
growth in trade.
