II. Trade impact of the financial crisis

Trade activity is one way of transmitting an international financial crisis. This is due both to the recessive impact generated on trade volume, as well as depressive effect on prices of exported products.¹ Although the degree of commercial opening up of Latin America may be weak compared with other developing regions, it cannot be denied that over the past ten years the region has undergone a rapid opening up process. This process has taken place as a result of trade reform characterized by the dismantling of non-tariff barriers and overall and unilateral lowering of customs duties. Thus, the degree of opening up of Latin America, measured by export ratios / GDP, went from 10% in 1980 to 22% in 1997, and from 15% to 26% if measured by the imports /GDP ratio, although this global evolution is hiding significant differences in levels among the countries of the region.² In this framework, an international financial crisis with its recessive effects on world growth, has had a greater fatally negative impact than in the past.

Undeniably, Latin America has improved in its export diversification, but the region continues to have a very marked specialization in the production of natural resource-intensive goods. Therefore, drops in the prices of raw materials have significantly buffeted Latin American economies.

Because the financial crisis is characterized by expansive movements in real exchange rates – strong depreciations –competitiveness of the countries in the region has been affected. This is all the more so for certain Latin American economies whose trade in goods was directed to other regions directly affected by the crisis.

The direct impact of the Asian crisis (to which we might add the Japanese recession) on the world economy has led to a reduction by half in the rhythm of growth of international trade. (Table 3) In that context, in 1998, the growth of Latin American exports, by volume, has slowed down by 4 percentage points when compared with the dynamism recorded in 1997.

That phenomenon in particular may be explained by the strong drop in Asian imports (including Japan) that principally affected Chile, Peru, Brazil, Ecuador, Uruguay and Argentina, countries for which Asia represents a relatively important proportion of their exports. (Table 4)

The strongest impact was felt by Chile: the drop in total imports by more than 13% may be integrally explained by the drop in exports to Asia. (Table 5) Peru follows and to a lesser degree, Brazil and Argentina.

The wide reach of Asian devaluations has raised the fearful spectrum of a setback in Latin American exports to third countries (including their own intra-regional trade). In effect, the share of total Latin American exports subject to Asian competition would be some 33%.³ This total rises to 35% in the case of intra-regional exports, and to almost 38% for exports to OECD markets. (Table 6)

A priori, Mexico is the Latin American economy most affected by Asian competition, followed by Uruguay, Brazil and Colombia. However, competition is potential, since the reordering of trade induced by Asian macro-devaluations is not automatic. In fact, four phenomena may prevent this possibility: the existence of trade agreements (of the multifiber type, bilateral preferences and others); the existence of regional agreements (particularly Nafta, Mercosur and the Andean Community); the differentiation of products and existence of installation costs or expansion of trade circuits. In practice, the extensiveness of cost reductions for Asian installation, generated by devaluations, leads us to expect a significant impact, except perhaps in the case of Mexico.

Another measure that alters the competitive balances is the result of the evolution of bilateral trade rates between Latin America and Asia, one year after the Asian crisis. (Table 7)

Once more, the loss of competitiveness has not been immediately effective, but represents a change in the relative prices that is sufficiently important to potentially lead to a reordering of medium-term trade.

The recession in Asian countries and slowdown in the growth of global trade have provoked a notable drop in the price of raw materials, particularly oil (already weakened by the significant stocks and overproduction by non-OPEC countries), copper, soybeans, fish and wood. The evolution of the price index of raw materials clearly shows that after a prolonged upswing that began in early 1993, particularly as of the Asian crisis, prices plummeted. The index actually reached its lowest figures for the decade on December 31, 1998. (Graph 6)

Graph 6 - Evolution of the CRP index of the price of raw materials 1990-1998

A similar evolution may be observed in the two components of the index: oil and copper prices, two important products insofar as production specialization of Latin American countries is concerned (oil for Venezuela, Mexico, Ecuador, Colombia and Argentina and copper for Chile, Bolivia and Peru). In the case of copper, the December 1998 price is the lowest for the century. (Graph 7)

As a result of this situation, a strong deterioration was observed in the terms of trade in 1998. Excluding Chile, oil-producing countries are the ones that have sustained the greatest losses: in one year, Venezuela has seen its trade ratio fall by more than 20%, Colombia by 9% and Ecuador by more than 8%. (Graph 8)

The negative impact of the fall in the prices of raw materials has been more important for the large economies of the region, excluding Brazil.

The fall in prices of raw materials and a slowdown in the growth of international trade volume are reflected in a decrease in export income for most of the Latin American countries.

Thus, except for Mexico, which is distinguished by an upward trend in its external sales despite a decrease in its oil income (that represents less than 10% of total Mexican exports), all the countries studied were affected. The most noteworthy cases were Colombia, Chile, Peru and Venezuela. (Graph 8)

Beyond short-term variations, Colombia is characterized by the stagnation of its exports since early 1997. In the case of Chile, the upward trend in its external income was interrupted in 1996 by the strong impact of the plunge in the price of copper and the erosion in the Asian demand.

The drop in exports is even more apparent in the cases of Peru and Venezuela. With respect to the first country, the fall that began in mid-1997, accelerating thereafter due to its trade dependence with Asia, (for the region Peru rank second, immediately following Chile). As for Venezuela, the fall that began as of 1997 is mainly due to the plunge in international oil prices.

Synthesis of the different national situations reflects the stagnation of export income as of October 1997 and the consequent downgrading of the global trade balance (Graph 9). Now then, the imports of the countries considered could not have continued with the same upward trend recorded since 1996. In effect, the strong deceleration in Latin American growth is evident in a rupture in the trend in the evolution of imports, which marks the beginning of a decrease in the trade imbalance, apparent as of December 1998.

In a context of uncertainty regarding external financing conditions for 1999, the sustained growth in the trade deficit was an important cause for concern as the inadequate foreign trade results aggravated the current account deficit, which went from 58 000 billion dollars in 1997 to 80 500 million dollars in 1998 (that is, 3% and somewhat more than 4% of GDP for the region, respectively⁴).

Graph 9 - Latin America: global trade performance

NOTES

¹ For a systematic study of the commercial impact on Latin America of the current international financial, see IDB, 1999.

² ECLAC, 1998b.

³ The methodology used to obtain these results appears in IDB, 1998.

⁴ ECLAC, 1988c.

http://www.sela.org
sela@sela.org
   SELA,  Permanent Secretariat
Torre Europa, Fourth floor, Urb. Campo Alegre, Av Francisco de Miranda,
Caracas 1060- Venezuela
Tlf: (58) (212) 955.71.11 Fax: (58) (212) 951.52.92