After 30 years of trade liberalization, now what?



Mauricio Mesquita Moreira | Inter-American Development Bank

Over 30 years ago, the countries of Latin America and the Caribbean embarked on a large-scale experiment to reintegrate into the global economy. After years of stagnation, international trade became the best bet for growth, creating jobs and closing the inequality gap.

But in the heat of the political debate, many of the expectations went beyond what the evidence and solid economic theory suggested, while others clashed with significant changes in the global economy.


The price of unrealistic expectations

This mismatch between expectations and realistic possibilities set the stage for much of the skepticism and fatigue generated by the region’s trade policy. Having placed the bar idealistically too high, governments and analysts made trade policy an easy target for attacks from those whose interests were threatened by liberalization and those who were opposed to free trade on ideological grounds.

As we show in the book Trading Promises for Results: What Global Integration Can Do for Latin America and the Caribbean, ironically the immediate victims of this mismatch were the most tangible trade gains in growth and welfare, whose relevance got lost in the clamor of overinflated visions. These unrealistic expectations also led governments to overlook the context in which liberalization was taking place.

They needed to create institutions and political alliances to ensure that these reforms would survive in the long term and coordinate trade with other complimentary public policies in the goods and labor markets (education, science and technology, and infrastructure, among others).

Learning this lesson seems particularly relevant today when many countries in the region are still recovering from the costly populist backlash and their trade policies face new and old challenges.

In the book, we make it clear that those who manage to move past these challenges have much to gain. Countries that were able to open their economies in a sustainable fashion accelerated their growth, on average by 0.6% per year, increasing per-capita GDP by 20% over 20 years. An achievement unlikely to have a parallel among other public policies.


New challenges…

Among the new challenges are the threats that the current trade frictions among major economic powers are posing to the rules-based multilateral trading system. Trade cannot be a driving force for the region’s prosperity if the world market is fragmented in blocs governed by power rather than law.

The most promising solutions for improving the governance and effectiveness of the system–without renouncing the fundamental principles of reciprocity and nondiscrimination–would be to relax the consensus and single undertaking principles, which have stonewalled the negotiations.


… and old challenges

Among the old challenges, regional integration has acquired even more strategic relevance in the current context of trade frictions. Its relevance and rationality depend on the convergence between the 33-existing intraregional agreements and on establishing the missing links between the largest economies in the region: Argentina, Brazil, and Mexico.

The potential benefits of convergence are not a panacea but can hardly be ignored: they would yield an estimated 11.6% increase in intraregional trade (or US$20 billion, based on 2018 figures). At the national level, protectionism is still alive and in good health in some of the largest economies in the region, all of which have suffered strong setbacks in their trade policies.

This challenge can be addressed through a combination of preferential agreements (both regional and global) and unilateral initiatives (preferably with the intention of converging with OECD levels), as did the most successful countries in the region. However, as argued before, it is necessary to support these efforts with complementary policies, institutional changes and political alliances that include measures to compensate the losers.


To view the full blog, click here.