A Chain Reaction: TTIP, TPP and Latin America

CLICK HERE FOR THE NEW GED STUDY: A CHAIN REACTION?

Our new GED Study Series “How do Mega-Regional Trade Agreements Affect Emerging Markets” shines light on the effects, the newest wave of Free Trade Agreements will have on various regions around the world.

Part one of this three-part series takes a closer look at the effects of TTIP, TPP and similar agreements on the Latin American economies and comes to some interesting conclusions.

For centuries, Latin America’s economies have revolved around digging up natural resources and shipping them overseas. Depending on the era, this could certainly be a lucrative endeavor, but commodity prices are notoriously fickle, and a focus on natural resources did not allow the region to build the manufacturing supply chains that have been instrument in East Asia’s rapid industrialization.

In the post-World War II era, many Latin American countries attempted to address this commodity reliance by implementing import-substitution industrialization policies. In practice, this meant high tariffs to discourage imports, thus protecting domestic industry.

But without international competition, Latin American products often turned out over-priced and underwhelming. And when the region did try to liberalize in the 1990s, it did not work out so well.

As the 20th century gave way to the 21st, a number of Latin American countries returned to commodities and protectionism, which was a fine strategy while Chinese demand for raw materials pushed prices through the roof. But those prices have fallen in recent years, and the region faces a familiar challenge: How to move beyond commodity exports and towards successful integration into international trade networks.

Could mega trade deals pose the answer?

As timing would have it, just as Latin American countries such as The Pacific Pumas (Chile, Colombia, Mexico and Peru) seek deeper integration into global trade, the world debates a series of mega trade deals.

How these deals will affect the region is a subject of our new study, A Chain Reaction? Effects of Mega-Trade Deals on Latin America. So what did we find?

Let’s start with the Trans-Pacific Partnership – TPP – an agreement between mostly Asian and American countries—including Mexico, Chile, and Peru. According to the modeling we did with the Ifo Institute, Peru could be a big winner here. Our model suggests TPP could lead to a 2.4 percent increase in real income. Specifically, we see a 45 percent value-added boost to the metal sector. These results stem from the observance that once tariffs are lowered, Peruvian producers are more likely to refine commodities domestically and to export more valuable intermediate goods. In other words, instead of just digging it up and shipping it abroad, more steps towards a final product would be conducted in Peru.

For Chile and Mexico, however, TPP may not be such a big deal. Both countries already have deep trade agreements with major TPP partners, so our model suggests a new agreement might only have a marginal impact.

The Trans-Atlantic Trade and Investment Pact—TTIP—the proposed trade agreement between the US and EU, could pose more of a threat to Latin America. Many Latin American countries trade extensively with the US. If the US and EU come to an agreement, Latin America could lose its insider-access to US markets.

For example, Mexico, which has traded freely with the US since the implementation of NAFTA in 1994, conducts nearly 80 percent of its trade with Uncle Sam. If the EU gets NAFTA-like access, Mexican exports to the US could fall by over five percent.

What about the countries that are not involved at all?

For example, Mercosur countries on the region’s Atlantic coast are not participants in TPP, TTIP, or any of the other megadeals we analyzed.

The biggest of these countries, Brazil, is not a member in any of the mega-deals, and maintains relatively high tariffs. Our model suggests that in terms of growth, the mega-deals will not have a major effect either way.

But they will effect Brazil’s export portfolio. With less relative access to markets participating in the mega-deals (such as the US, EU and Japan), Brazil could increasingly rely on trade with China—another outlying country—and one which does not need Brazil’s manufacturing goods. In our model, Brazil’s manufacturing sector would shrink in all scenarios, threatening to leave to country back where it started: digging things out of the earth and sending them abroad.