Enabling Trade in the Pacific Alliance:
2. Production Integration Perspectives
This section is an executive summary of the following report: “Perspectivas de integración productiva entre los países de la Alianza del Pacífico”, April 2013, Inter-American Development Bank, Washington DC.
Trade ties across the Pacific Alliance countries are currently limited. For each country, trade within the Alliance represents on average only 6% of its total exports. But the importance of the Alliance for each of the countries has been growing steadily (Figure 1). Most crucially, the four countries today share a vision of integration backed by a set of common factors, including stable democracies with prudent macroeconomic managements, favourable business environments, strong commitments to openness in trade and investment, and a common geographic location around the Pacific basin.
Figure 1: Intraregional Exports as a Share of Total Exports
Source: IDB, based on data from United Nations (UN) Comtrade
Different trade patterns indicate different economic structures and the existence of potential production complementarities. Evidence from bilateral trade balances shows that, in general, Colombia, Chile and particularly Peru show, on the one hand, surpluses in raw materials and natural-resource-intensive goods when trading within the Alliance, and, on the other, deficits in manufactures that are closer to final consumption. The opposite is generally the case for Mexico (Figure 2). This suggests that a likely pattern of production complementarities within the group is one in which Mexico tends to be positioned closer to final stages of the supply chains, Peru in more upstream segments and Chile and Colombia somewhere in the middle. This finding is supported by a more detailed analysis using a new measure of supply chain participation, consisting of the extent to which a country uses imported inputs (or foreign value added) to produce goods that are later exported.6
Figure 2: Bilateral Trade Balance – Each Member Country vs Rest of the Pacific Alliance (in millions of US$, 2011)
Source: IDB, based on data from UN Comtrade
The trends in currently-observed production complementarities are associated with strong comparative advantages. For instance, an analysis using product-level data shows the existence of production complementarities based on clear comparative advantages, such as Chilean cellulose and processed wood used in Peru and Mexico to produce doors, windows and furniture; denim fabric from Mexico used in Chile, Colombia and Peru to produce clothing; polymers of propylene from Colombia used in Mexico and Peru to produce plastic containers; and zinc, lead and tin from Peru used in Chile, Colombia and Mexico to produce wires and batteries.7
Even in the presence of barriers to trade and investment, some production complementarities are observed, mostly associated with strong comparative advantages within the Alliance. However, many other potential complementarities could flourish if deeper stages of integration were pursued.
Countries more tightly integrated with each other are more inclined to share international production networks. An economic analysis that examines the impact of different types of trade agreements on a measure of supply chain participation – specifically, the foreign value-added of exports – provides support to this claim. The results indicate that deep trade agreements, such as free trade agreements, customs unions or economic unions, are associated with an impact on the formation of an international supply chain that is over two times higher than the impact generated by shallow agreements that only slash tariff rates (Figure 3). Deepening integration across the Alliance will provide more incentives for the formation of international supply chains. Incorporating a number of disciplines that are typical of deep integration agreements is likely to address several dimensions that are important for supply chains to function well.
Figure 3: Estimated Impact on the Foreign Value-Added of Exports, by Trade Agreement
Source: IDB, 2013
Deeper integration within the Pacific Alliance will also serve as a platform to enhance trade and investment ties with countries outside the group. For instance, exploiting production complementarities within the Alliance will help member countries reach other markets with more competitive goods. Likewise, a more integrated economic space will encourage the attraction of investment and production blocs from outside the region which will be subsequently sliced and shared among the group’s countries. These enhanced trade and investment opportunities are most likely to occur with the Alliance’s main trade partners (e.g. United States (US), People’s Republic of China, Japan, Brazil and Germany), as well as with partners sharing trade agreements, a group that increasingly covers countries in Asia-Pacific (Figure 4).
Figure 4: Pacific Alliance Trade Agreements