latin america to china and india trade

Substitutabilityandprotectionism:LatinAmerica’stradepolicyandimportsfromChinaandIndia∗GiovanniFacchini†,MarceloOlarreaga‡,PeriSilva§,GeraldWillmann¶August2006AbstractThispaperexaminesthetradepolicyresponseofLatinAmericangovernmentstotherapidgrowthofChinaandIndiainworldmarkets.ThereisevidenceofhigherlevelsofprotectionthroughouttheregioninsectorswherealargeshareisimportedfromthetwoAsianeconomies,butthiseffectisdrivenbyChina.ImportsfromIndiaoftenfacedlowerlevelsthanimportsfromtherestoftheworld.Toexplainthesepatterns,weextendthe‘protectionforsale’modeltoallowfordifferentdegreesofsubstitutabil-itybetweendomesticallyproducedgoodsandgoodsimportedfromdifferentregions.TheextensionsuggeststhathigherlevelsofprotectiontowardsChinesegoodscanbeexplainedbyhighsubstitutabilitybetweendomesticallyproducedgoodsandChinesegoods,whereaslowerlevelsofprotectiontowardsgoodsimportedfromIndiacanbeexplainedbylowsubstitutabilitywithdomesticallyproducedgoods.Thedatasup-portstheextensiontothe‘protectionforsale’model,whichperformsbetterthantheoriginalspecificationintermsofexplainingLatinAmerica’sstructureofprotection.JELclassificationnumbers:F10,F11,F13Keywords:LatinAmerica,Protectionism.∗WearegratefultoPravinKrishnaforconstructivecommentsandsuggestionsonanearlierversion.ThisprojectwassupportedbytheWorldBank’sChiefEconomistOfficeforLatinAmericaandtheResearchSupportBudget.Theviewsexpressedherearethoseoftheauthorsanddonotnecessarilyreflectthoseoftheinstitutionswithwhichtheyareaffiliated.†UniversityofIllinois,484WohlersHall,MC-706,1206S.SixthStreet,Champaign,IL61820,USA;phone:[phone];email:[e-mail].‡OfficeoftheChiefEconomistforLatinAmerica,BancoMundial,Carrera7,no7-21,Piso16,Bogota,Colombia,andCEPR,LondonUK;phone:[phone](ext.257);fax:[phone];email:[e-mail].§UniversityofNorthDakota,Gamble290L.CentennialDrive,GrandForks,ND58202,USA;phone:[phone];email:[e-mail].¶UniversityofKiel,Christian-Albrechts-UnversitatzuKiel,Wilhelm-Seelig-Platz1,24098Kiel,Germany;phone:[phone];fax:[phone];email:[e-mail].1IntroductionChina’sandIndia’sfasteconomicgrowthduringthepastdecadeisparalleledbytheirgrowingpresenceinpolicydiscussionsthroughoutLatinAmerica.ThesuccessofthetwoAsianeconomiesisnotonlylookeduponwithadmiration,butisoftenaccompaniedbyconcernsontheeffectsthatgrowingtradeintegrationwithChinaandIndiahasonthemanufacturingsectorthroughouttheregion.Textiles,apparel,shoemanufacturingandtoysareamongstthesectorsworsthitbyinternationalcompetition.InmanyLatinAmericancountriesrequestsforexplicitprotectionarebecomingmoreandmorecommon.BrazilianmanufacturershaveofficiallyaskedtheirgovernmenttolimitimportsofChinesesilk,velvetandpolyesterthreadbyimposingimportquotasand/orincreasingtariffs.Furthermore,anadditional70Chineseproductsarebeingreviewedbythetextileindustrytodeterminewhethersimilarprotectivemeasuresaretoberequested.Acomuniqu´ebyArgentina’sAssociationofMediumEnterprisecallsfornotrepeatingthe“ofthenineties,whenan’invasion’ofChineseproductsdestroyedentiresectorsofthemanufacturingsector.”Andthishasbeennoticedbylocalpoliticians.AfterarecentmeetingwithitsChinesecounterpart,theBrazilianMinisterforIndustry,DevelopmentandCommerceLuizFurlanwasquickinhighlightingthat“ImadeitverycleartoMinisterBoXilaithatwewilltakethelegalstepstogiveBrazilianindustrytherighttoprotectitself”.1Notwithstandingtheircountry’sprivilegedaccesstotheUSmarket,MexicanpoliticiansshowsimilarfeelingsandaregrowingmoreandmorenervousaboutMexico’sburgeoningtradedeficitwithChina.ItisnotsurprisingthenthatafterarecentmeetingwiththeChineseleaders,presidentFoxwasveryhappytoreportthat“TodayweheardfromPresidentHuhisenthusiasm,hishelp,hissupportinclosingthecommercialgap...”.2WhileGATT-WTOboundsinprincipledonotallowcountriestoincreaseprotectionvis`avisChinaandIndia’sproducts,mostdevelopingcountrieshaveboundtariffswellabove1AsreportedbyYahoo!onOctober42005.See“MexicobuildstradetieswithChina”byJ.C.MckinleyinTheNewYorkTimesofSeptember19,2005.1theirappliedlevels,asituationthatdefactoenablesthemtosignificantlyincreaseprotectionwithoutviolatingtheirGATTobligations.3Similarly,antidumpingandsafeguardrulesarequitelaxandtheseinstrumentshavebeenoftenusedbybothdevelopedanddevelopingcountriesagainstChineseimports(atleastuntilChina’saccessiontotheWTO).4Giventhesubstantialdegreeofflexibilityenjoyedbydomesticpolicymakersinimple-mentingtradepolicieswithintheWTOrules,weareinterestedinexploringwhetherthecharacterizationofChinaandIndiaassourcesof“cheap”and“unfair”importshasledtoincreasedprotectionismongoodsthatareheavilyimportedfromthetwoAsianeconomies.5OurinitialanalysisindicatesthatthisisindeedthecaseforLatinAmericanimportsfromChina.Onaverage,tariffsandnontariffbarrierstendtobehigheringoodsthatareheavilyimportedfromChina.GoodsimportedfromIndiaontheotherhandtendtofacelowerlevelsofprotectionthanimportsfromtherestoftheworld.WithinLatinAmerica,thisresultholdsfortheAndeancountries,theSouthernConeandMexico,