Conclusions

The idea of an economy facing a competitive threat has been much discussed and in a world of instant adjustment, trade diversion as an economy's market share is taken by a lower cost or higher quality competitor will pose no problems. In practice we have argued that once a whole range of real world considerations are introduced growth can be cumulative and export success in dynamic products with strong learning externalities can place an economy on a higher growth path than a concentration on an alternative set of 'simpler' export goods. The current trading environment is characterized not just by a lowering of tariff barriers through the WTO, but also by major reductions in transport and communications costs leading to a fall in 'trade cost' more broadly. In this situation the rise of PRC is important both because its size and rapid growth suggest important trade creation effects as it provides an expanding markets for others, and because it is becomingly increasing competitive in a wide range of goods in both low and high technology categories.

Latin America is still somewhat distant from this process. Some countries are benefiting from growing imports of primary and RB products by PRC, although in general PRC remains a relatively small market for LAC, although as an import supplier PRC has just overtook Japan in 2003. The trade structure of most of LAC is generally more complementary than competitive with that of PRC. The exceptions are principally Mexico and Costa Rica, that similar to PRC, are closely integrated into production networks of MNCs. With a differing export structure the likelihood of damaging trade diversion effects is weakened.

Our analysis has provided a simple framework for classifying trade data on the basis of 'competitive threats'. In general the threatened (direct plus partial) category at just below 40% of all trade is well below a comparable figure for EA. Goods in the more serious direct threat category are only 10% of total trade. Interestingly the two LAC economies with the most similar export structure, Mexico and Costa Rica, have very low shares of trade in the direct threat categories (2% and 6%, respectively) although the shares in the partial threat groups are far higher (32% and 69%, respectively). When the US market alone is considered the direct threat groups remain small and now the partial threat share is also much lower (8% for Mexico and 33% for Costa Rica), reflecting rapid export growth from these economies to the US up to 2002.

We should stress some caveats to our basic results on competitive threats. Apart from the problems in attributing causation to these relationships, we emphasise that the past may not be a good guide to the future, particularly as far as the rather sanguine result for Mexico goes. Ironically the long-time suspicion of export-oriented FDI in Latin America may prove relevant here, if in the face of falling trade costs that lower the disadvantage of distant production locations, MNCs decide to shift from bases in Mexico and Central America to take advantage of lower labour costs in PRC. It is this process, at least as much as competition from exports from PRC, that produces the real challenge to policy makers in Mexico in serving the US market.

Our analysis of bilateral trade between LAC and PRC reveals a striking tendency towards a pattern of specialization with LAC a net exporter of primary products and a net importer of manufactures. The patterns of the two regions are almost a classic textbook illustration of trade between developing and industrialized regions, where the former (i.e. LAC) strengthens its specialisation in primary products and processes resources while the latter (i.e. PRC) does the reverse. What is surprising is that LAC is the richer region, with a longer history of modern industrialization, higher human resources, more FDI per capita and with more liberal trade and investment regimes. The result is arguably a massive downgrading of comparative advantage in a dynamic sense, surprising for such a relatively industrialized region.

The non-threatened LAC countries – which have such different specialisations that they do not face Chinese competition in the US or elsewhere – may nonetheless face a serious threat to their long-term development. A heavy reliance on primary and resource-based products is not conducive to a dynamic comparative advantage or technological upgrading, yet any such upgrading may well face a strong competitive threat from PRC because the kinds of products they may feasibly move into are already 'taken' by PRC. The issue is then much less about current competition, but more about the future 'spaces' open for the development of industrial exports in a liberalised world in which PRC is pre-empting many markets for products that developing countries can export. LAC will remain a high wage location relative to PRC for the foreseeable future and it will require h high levels of skill or technological competence to offset this.

This point about patterns of specialization and levels of skill and technological competence raises more general issues concerning LAC's competitive position in the world economy, its institutional structure and apart from Mexico and some Central American economies, its relatively weak positioning in global production networks (see Lall, Albaladejo and Moreira 2004). These are not problems created by the 'rise of PRC' but the substantial global trade diversion and trade creation resulting from PRC's rapid expansion are creating new challenges and hence making it more urgent to address these longer-term issues.

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