April 30, 2012 / 5:33 PM / 5 years ago

Analysis: Latin American trade barriers seen backfiring

A man waves a flag with the YPF logo in front of the Argentine Congress in Buenos Aires April 25, 2012.Marcos Brindicci

PUERTO VALLARTA, Mexico (Reuters) - Import restrictions imposed by Argentina and Brazil may end up harming the very domestic industries they are trying to protect and also could affect other economies in Latin America.

Trade experts and policymakers from trading partners are dismayed by signs of protectionism creeping back to the region, which embraced free trade only in the 1980s after decades of inward-looking policies.

Brazil bullied Mexico recently into a deal to limit car imports and Argentina has upset trading partners with arbitrary import controls and the planned expropriation of Spanish-controlled energy company YPF (YPFD.BA).

The moves mark a flare-up in trade tensions, which had remained largely absent even during the global financial crisis.

Import restrictions have a direct impact on trading partners, such as Uruguay, where exports to Argentina fell in the first quarter after a 15 percent jump in 2011, and Mexico, which will have to limit car exports to Brazil to an average $1.55 billion in the next three years.

More broadly, experts say the measures will backfire on domestic industries and also run a risk of disrupting the supply chains vital to $18 trillion in global trade, which involve specialized production of many different components used in finished goods.

Latin America is now more linked to global trade networks than ever before. The region's dependence on trade has increased by about 40 percent since 1980, with imports and exports now equivalent to 42.1 percent of the region's gross domestic product (GDP), according to International Monetary Fund data.

This makes it more vulnerable to supply chain upsets.

"When you pick up a packet of noodles in Jakarta, it might have wheat from Australia, some other ingredients from New Zealand, packaging from Thailand and design done in Singapore," said New Zealand Trade Minister Tim Groser, attending Group of 20 trade meetings in the Pacific resort of Puerto Vallarta.

"Shockwaves from even relatively small protectionist measures can cascade through the global supply chain with very serious consequences."

Research prepared for the G20 meeting by the World Trade Organization and the Organisation for Economic Cooperation and Development shows 56 percent of global goods imports and 73 percent of services imports are intermediate products such as components and parts rather than finished ones, highlighting how countries depend on each other.

CASE STUDY

Argentina is a case study in how much is at stake. After introducing in February a new system for pre-approving imports, purchases from abroad fell 8 percent in March from a year ago.

While intermediate goods and parts make up half the country's imports, two-thirds of export income comes from manufactured goods. This means that limiting imports can cut domestic manufacturers off from access to potentially cheaper, higher-quality components than local producers can supply.

Even before the new measures, carmaker Fiat FIA.MI suspended shifts at one of its plants, blaming delays in government approvals for parts.

"If you shut yourself off, you're going to pay higher prices and it's going to be lower quality," said Bernard Hoekman, director of the World Bank's trade department, on the sidelines of the World Economic Forum in Puerto Vallarta.

"In terms of longer-term growth prospects, you're shooting yourself in the foot."

Harvard academic Ricardo Hausmann, whose native Venezuela upset Colombia's economic recovery by virtually shutting down bilateral trade in 2009 in a political dispute, said protected industries also missed the benefits of competition.

"(They are) less productive because they can only cater to a small domestic market and not benefit from the scale that a global market would offer," he said.

In Latin America's No. 2 economy Mexico, where 75 percent of imports are intermediate or semi-finished products, manufacturers have a lot to lose from protectionism. IMF data show Chile and Mexico are the most trade-dependent countries in Latin America.

Even in commodities-rich Brazil, which is much less integrated into global supply chains than the free-trade disciples along the Pacific coast, raw products and intermediate goods make up close to half of total imports.

Brazil has announced successive stimulus packages to help lift home-grown industries out of a slump, including tax breaks and preferential treatment in government buying, but increased output will mean more demand for inputs that local suppliers may not be able to provide.

"I think a lot of the measures we're seeing are essentially trying to increase local content, increase domestic activity," said the World Bank's Hoekman.

"For that to work, I think you need to have that capacity in-country. And a lot of countries don't have that because they're really specializing in a small part of the chain."

ECHOES OF THE PAST

Latin America is not the only region resorting to protectionist measures. But many think it should have learned from the failure of import-substitution industrialization policies under military governments for much of last century that are blamed for laying the foundations for the 1982 debt crisis and a decade of lost growth.

Starting in the 1950s, governments aimed to wean their economies off dependency on raw materials exports and instead stimulate local industries to supply domestic markets.

But although growth accelerated, much of the expansion was financed by external debt and when recession hit in the late 1970s, governments were unable to make repayments. By the end of the 1980s, GDP per capita was lower than at the start in countries including Argentina, Chile and Mexico.

"It's really a setback for the region, which has made such progress in the last few decades towards integration in the global economy," Chile's Economy Minister Pablo Longueira said of the return of trade barriers.

"Protectionism is responsible for the level of poverty and inequality that we have in the region," he said. "We're worried that this tendency is starting to proliferate."

Additional reporting by David Alire Garcia; Editing by Philip Barbara

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