Summary

During the past half-century, the world trading system has undergone a substantial transformation. Since the early 1960s, world trade has grown at an average annual rate of 6.5% and trade relative to output has more than tripled.¹ In line with these developments or as a consequence of them, the world trading system has brought about changes in governance and spurred technological innovation. On one hand, the evolution of a rules-based system monitored by the World Trade Organization (WTO) has helped establish an environment where beggar-thy-neighbor policies are all but nonexistent and tariff barriers to trade have substantially declined—globally, tariff rates have fallen from close to 30% in the 1980s to about 10% in 2005 (WB 2009c). On the other hand, the development of long-distance maritime transportation and communication technologies has helped reduce trade costs and time of delivery.

The globalization of the supply chain and intra-industry trade—fueled by increased trading of intermediate and final goods, which accounted for 27% of all trade in 2006—have reached unprecedented levels, with increasing opportunities for developing countries to take on ever more active roles in the global economy (Brülhart 2008). At the same time, scale economies in transport, advances in infrastructure and transport services, containerization, further streamlined processes, and the production of manufactured goods have all led to economic agglomeration and changed the landscape of the world economy. Trade patterns have shifted, with increasing flows between neighboring countries and trading blocs with similar factor endowments. In line with these developments or as a consequence of them, the world trading system has brought about changes in governance and spurred technological innovation. On one hand, the evolution of a rules-based system monitored by the World Trade Organization (WTO) has helped establish an environment where beggar-thy-neighbor policies are all but nonexistent and tariff barriers to trade have substantially declined—globally, tariff rates have fallen from close to 30% in the 1980s to about 10% in 2005 (WB 2009c). On the other hand, the development of long-distance maritime transportation and communication technologies has helped reduce trade costs and time of delivery.

As a result, countries are rethinking the value of regional trading blocs and creating stronger incentives to deepen integration. Similarly, freight logistics, specialized infrastructure, and trade facilitation measures have become of increasing importance in reducing non-tariff barriers and transportation costs to reap benefits from increased integration. A 10% decrease in freight costs and tariffs would boost bilateral imports of Latin America and the Caribbean (LAC) by 46% and intraregional exports by an average of 60% (IDB 2003). Consequently, developing countries are finding themselves hard-pressed to adjust their trade policy agenda to take into account trade costs not covered in past rounds of trade negotiations.

LAC have been no exception to the new trends in regional trade and transport logistics. Tariffs in the region have declined from over 40% in the mid-1980s to about 10% in 2008, while more than 57 regional integration initiatives have been subscribed between countries and trading blocs since 1990 (WB 2009b; WTO 2009b). Nevertheless, the share of intra-regional trade within the region's major trading blocs has declined—when compared with the commodities trade—or remained at about the same level as in 2000, pointing to limitations in the integration process (WTO 2009b). In part, these have been caused by limited progress in trade facilitation measures, but difficulties have also arisen from deficiencies in funding opportunities and political deadlocks in advancing a more integrated trade and policy agenda.

Thus, despite efforts to increase regional cooperation in trade and infrastructure, LAC shows weak performance when compared not just with industrial countries but also with other developing regions. Logistics performance indicators consistently show LAC countries underperforming relative to other emerging markets, not to mention the member countries of the Organisation for Economic Co-operation and Development (OECD). According to the World Economic Forum's Enabling Trade Index (ETI), which measures and analyzes institutions, policies, and services enabling trade in national economies around the world, LAC ranks above the less-developed Central Asia and sub-Saharan Africa countries.

Furthermore, intra-regional trade within the region's largest trading blocs represented only 13% of total merchandise exports compared with 74% for the 27 members of the European Union in 2007.² In large part, physical integration to facilitate intra-regional trade has proved difficult to consolidate due to geographical limitations, complex environmental concerns, and financial restrictions that increase the associated commercial risk of transnational and regional projects and impede a regional physical integration agenda from flourishing.

Nevertheless, although the challenges posed by deepening the process of integration through trade facilitation measures are great and can be costly, the potential benefits of such efforts far outweigh their costs (see Milner, Morrissey, and Zgovu 2005 for a review of associated literature). Increased efficiency in freight logistics and the advancement of trade facilitation infrastructure enables new regional players to enter the global economy—promoting competition, improving distribution thereby reducing logistic costs for companies, and allowing firms to take advantage of market access opportunities created through regional and multilateral trade agreements. However, without a renewed focus on the costs of trade transactions, the region will be unable to take advantage of self-reinforcing production and trade networks. Additionally, economies of scale in production and transportation performance elsewhere may raise the relative costs of doing business in the region and make it more difficult for LAC to compete globally. As such, freight logistics and trade facilitation measures are of paramount importance for the LAC.

Here the role of the Inter-American Development Bank (IDB) is of increasing importance. As political agendas between member states require balance with the development of a cohesive regional political and economic architecture, the IDB can spearhead many of these initiatives as an efficient vehicle for policy, projects, and regional cooperation. The policy recommendations and the agenda developed have been expanded to increase coordination of national trade and freight logistic initiatives while emphasizing the harmonization of cross-border interactions. Policy recommendations included in the Bank's agenda place emphasis on: provision of basic infrastructure, particularly road networks and development of the trucking service industry; improvements in services and regulations that facilitate public-private partnerships, as in port and railroad infrastructure; improved services delivered by the State, such as customs management, border crossings, information and communication technologies (ICT), and security; support for logistic and value chain management development in small and medium-size enterprises, operators, and intermediaries; implementation of an institutional organization for high-quality logistics; integration of an “axis-based” regional infrastructure development criteria, giving priority to projects of greater regional impact; development of financial mechanisms to increase investment in key areas; and commitment to an agenda for productive regional integration and freight logistic services, supporting national and subnational entities in the public and private sectors.

Overall, these initiatives will help the region better cope with a changing international environment and allow it to exploit the positive links between trade, integration, and economic growth.

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