Latin America in the age of mega-regional trade deals

Just months into 2015, the world is poised to reset the stage of international trade. A new negotiating agenda is gaining momentum. Leaders are striking up important conversations about trade openness and making progress in mega-regional trade agreements.

The past 20 years has seen spectacular growth in world trade – new countries have joined the global marketplace, creating opportunities in places that otherwise might still be mired in poverty. The World Trade Organization (WTO) has helped to drive growth and poverty reduction in ways that would have been hard to imagine at its founding 20 years ago.

Yet today, world trade is fragile. Before the 2007-08 crisis, trade was growing at almost twice the level of real global GDP growth. Today, trade growth lags behind global GDP growth, hovering at 3% or below. The causes for this are complex. They go beyond the slowdown in global growth and are related to more fundamental, long-term changes. Trade growth increased in the 80s and 90s as tariffs were lowered and production fragmented into global supply chains. It decreased in the 2000s as the pace of this process slowed.

But 2015 could be a turning point. Disappointment at the slowing engine of trade may provide fertile ground for policy action. Indeed, there are signs of new energy already.

For one, there is the WTO Bali agreement, the most significant since the WTO was established 20 years ago and a strong endorsement of multilateralism. The cornerstone of this achievement – the Trade Facilitation Agreement – promises to reduce trade costs in countries around the world.

There have also been significant signals recently that the United States, the world’s biggest economy, stands behind global trade. One such is the discussion around the Trade Promotion Authority (TPA), which would speed the country’s ability to approve trade deals.

Yet another sign is the growing energy around the Trans-Pacific Partnership (TPP), a landmark preferential trade agreement. The TPP would define trade rules for an area covering 40% of global output and set a new standard. Countries negotiating other preferential trade agreements would likely attempt to match the quality and depth of integration codified in the TPP. This dynamic would give new momentum to discussions between the US and European Union on the Transatlantic Trade and Investment Partnership (TTIP), and negotiations on the Regional Comprehensive Economic Partnership (RCEP), a trade agreement involving 16 countries in the Asia-Pacific, including China.

One very important development in Latin America is the Pacific Alliance, an ambitious and forward-looking integration scheme between Colombia, Chile, Mexico and Peru, that aims at liberalizing the movement of goods, services, people and capital among participating countries. It is also a good platform to further strengthen trade relations with Asia Pacific countries. Its vision and boldness has attracted the attention of nations worldwide.

The new energy that mega-regional agreements may inject into the world economy is good news for Latin American countries and for the world at large – even if very few are actually part of most of these negotiations. Its potential for developing new rules in areas such as regulatory coherence, state owned enterprises and digital trade, among others, may break ground in areas of increasing relevance in global trade.

The impact on each country, however, may vary, depending on the agreements themselves but also on its starting conditions and trade structure. It will depend on the extent to which a country is connected to global value chains or how reliant it is on exports of natural resources or on its own domestic market. Whether a country opts to resist or embrace these changes will also define its future standing in global trade.

All countries in the region would gain from a strengthened and effective WTO, to help mitigate the friction and fragmentation that may result from the mega-regionals. Prompt and full implementation of the TFA and the other items agreed in Bali is key to solidify the WTO’s centrality in the future. A renewed work program that would include both Doha Round issues and new topics relevant to the global economy, as well as an enhanced monitoring and surveillance role for the WTO, are also essential. It is in Latin America’s interest to make a decisive contribution towards moving this agenda forward.

The World Economic Forum on Latin America 2015 takes place in Riviera Maya, Mexico, from 6-8 May.

Author: Anabel González, Senior Director, World Bank Group Global Practice on Trade & Competitiveness and Chair, World Economic Forum Global Agenda Council on Competitiveness

Image: Containers are stacked on a ship in the port of Lazaro Cardenas, Mexico, November 21, 2013. REUTERS/Edgard Garrido