Wednesday, April 4, 2012

International Trade Within Regions

One of the great strengths of the U.S. economy has long been its enormous internal market. In addition, in the last few decades the U.S. has extended this open regional trading area to embrace Canada and Mexico.  Some other regions of the world, like Europe and Asia, also have a high degree of intra-regional trade. However, in Africa, Latin America, and the Middle East, trade within the region is quite limited.

The table below shows merchandise trade by regions: the rows show merchandise exports from countries within a region while the column show merchandise imports to countries each region. Thus, the diagonal cells show exports from and to the same region. (Thanks to Danlu Hu for putting together this table from World Trade Organization data available here in Table 1.4.)

For example, look across the "Europe" row, showing the destinations by region of merchandise trade leaving Europe. Well over half of exports leaving countries of Europe end up being imported by other countries of Europe. Or look across the "Asia" row, where slightly more than half of all merchandise exports from Asian countries end up as imports in other Asian countries. In the North American region, a little less than half of the merchandise exports of the region end up being imported by other countries in the region, but of course, one reason this figure is lower than in Europe is the existence of the huge internal U.S. market. Trade from Germany to France shows up in these statistics; trade between California and Texas does not.

But now look at the other regions. In Africa, for example, the absolute level of trade is quite low by comparison with other regions. But what jumps out from these statistics is that only about one-eighth of the merchandise exports from Africa end up in other African nations. Similarly, in the Middle East, only about one-eighth of the merchandise exports from countries in the region end up as imports to other countries in the region. In South and Central America, only about one-third of the merchandise exports from countries in the region end up as imports to other countries in the region.

The modern theory of international trade emphasizes the benefits that trade brings in terms of economies of scale of production, greater variety, and greater competitive pressures for raising productivity. Regions with such low levels of intra-regional trade are missing these benefits, as a number of disparate commenters have noticed.

In the case of Latin America, for example, the Economist magazine had a March 10 leader called: "Trade in Latin America--Unity is strength-- Regional integration, not protectionism, is the right response to fears of deindustrialisation." 

"Brazil should be leading a new push to tear down barriers within Latin America as a whole. Consider its agreement with Mexico. The car industry in both countries has benefited because, by offering a larger market and more economies of scale, it has encouraged specialisation. That, in a nutshell, is the case for regional economic integration. Yet, despite a torrent of rhetoric and a mountain of presidential summits in recent years, integration has languished. Latin American countries export much less to their neighbours than do their counterparts in other continents. Huge distances are partly to blame. But trade is also checked by higher tariffs, hold-ups at customs, a tangled skein of separate trade agreements and poor transport links."

Indeed, a recent paper by José Peres Cajías, Marc Badia-Miró, and Anna Carreras-Marín called "Intraregional trade in South America, 1913-50. Economic linkages before institutional agreements"

points out that this is a long-standing issue in the Latin American region, and that a larger share of exports from Latin America ended up as imports to other Latin American countries back in the 1940s than occurs today.

In the case of Africa, I posted last December 15 about Africa's Prospects: Half Full or Half Empty?, and one of the themes in the "half-empty" category is the enormous infrastructure deficits, especially in railroads and electricity, that hold back economic integration across Africa. 

In the Middle East, I posted on January 27 about a report on "The economics of the Arab Spring," which among other points emphasized: "With a population of 350 million people that share a common language, culture, and a rich trading civilization, the Arab world doesn't function as one common market. ... Few Arab countries consider their neighbors as their natural trading partners. Pan-Arab trade is noticeably insignificant. Despite having tripled between 2000 and 2005, the share in intra-Arab trade in total merchandise trade still hovers around 10 percent. ... The share of intra-Arab imports, despite having fluctuated widely, is only marginally higher than that in 1960. ... Even this limited trade is geographically clustered, with countries in the Gulf and North Africa trading predominantly within their own sub-regions. ... It is ironical that a region that connects Asian merchants with European markets is itself stuck in primary production. Everywhere in the world proximity to coasts tends to be associated with lower transport costs and better access to global markets. The Arab world defies these forces of gravity, however."

Across Latin America, Africa, and the Middle East, arguments about the problems of international trade often focus on concerns about being exploited by high-income economies. Whatever the (dubious) merits of these claims in the modern economy, such arguments about trade with high-income countries don't explain why these regions have so little intra-regional trade.  For these regions, it might make sense to put the Doha round of the World Trade Organization talks on the back burner--after all, those talks have now been lingering on since 2001 without a resolution in sight. Instead, they should set aside the bogeyman of trade with high-income countries, and make a real effort to create the legal, regulatory, transportation, communication, and financial infrastructure to make serious gains in intra-regional trade.