In the middle of 2014, world trade entered into a second phase of contraction after the collapse generated by the financial crisis of 2008–2009. In the slowdown in Latin American and Caribbean exports, which was characterised by greater adjustments than the world average, two concurrent factors weighed heavily: a historic shock to the terms of trade and the most severe regional recession in recent decades.
As a consequence, most countries experienced a worsening of their current account imbalances at a time when international financing conditions are expected to harden.
The intensity and the duration of the trade contraction indicate that the global trading system has entered a new normal. The slowdown in trade globalisation derives from both real and nominal phenomena that have profound implications for the global insertion of Latin America and the Caribbean. On the real level, the weak demand of developed countries is no longer compensated by the dynamism of emerging economies that are undergoing, for different reasons, intense adjustments that will take time to complete.
On the nominal level, the regional terms of trade shock, driven by a sharp correction in commodity prices, reflects not only the confluence of the above-mentioned real factors, but also qualitative transformations in global production processes. Furthermore, in the medium term, the pressure on prices could be amplified by the expected appreciation of the dollar due to the progressive hardening of monetary policy in the United States. As with the downshift in world trade, these real and nominal trends outline an external scenario that may entail a change of gear in the policies that support the international insertion of Latin America and the Caribbean.
In the short-term, the region faces a new configuration of real exchange rates that do not favour the growth of exports through the intra-regional channel. In a longer-term perspective, there is heightened urgency for the adoption of policies that promote trade diversification.
The end of the commodity price super cycle exposes the duality of the region in terms of trade specialisation, and the vulnerability that arises from concentration in the export of commodities and their derivatives, further accentuated by the movement of certain countries towards lower value-added segments of the production chain.
It is thus necessary to accelerate the agenda of international trade negotiations in countries that still do not have access to a sufficiently deep and articulated network of preferential agreements.
Also, in those countries that need to preserve and broaden their margins of preference, it is urgent to adopt complementary policies to boost preference utilisation and trade facilitation. It will be crucial to consider that, for the region, the external context over the next few years will be more challenging than the one that prevailed over the past two decades, not only due to the economic factors analysed in this report, but also due to the political environment that is increasingly skeptical of market integration, especially in developed countries.
In adapting to the slowdown of globalisation, the region will require a high dose of political will, as well as effective and efficient instruments to support the private sector in a rapid and incisive process of internationalisation.
Taken from the Inter-American Development Bank’s latest Trade And Integration Monitor on the region.