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Latam’s India challenge: market for commodities, but manufacturing competitor

Tuesday, July 27th 2010 - 23:30 UTC
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IDB President Luis Alberto Moreno: time to look at the other Asian giant IDB President Luis Alberto Moreno: time to look at the other Asian giant

India could become a fast-growing market for Latin American and Caribbean commodities but governments in this region must foster closer ties with the 1.1 billion population giant and reduce trade costs to tap into that opportunity, according to a new study by the Inter-American Development Bank (IDB).

According to the study India has the potential to be a large buyer of agricultural and mineral goods, Latin America’s main exports. Currently, India represents just 0.8% of this region’s overall trade, compared with China’s 7.7% share.

“The region and India are increasingly together at the table when major decisions are taken,” IDB President Luis Alberto Moreno said. “We are starting to see greater integration among them and there is a tremendous opportunity for more trade and cooperation. Latin America and the Caribbean are poised to advance confidently into a promising future and India is increasingly interested in being an active partner in that process.”

In order to boost trade, both India and Latin America must lower tariffs and trade barriers, the study concludes. India’s average tariff on Latin American agricultural goods is 65%, more than five times China’s 12.5% tariff. Even though Latin American tariffs on Indian goods are not as high—reaching 9.8% in the case of manufactured products—they are well above the 4 to 6% OECD range, the study said. A 10% reduction in average tariffs imposed on Indian products, for example, would likely increase imports of Indian goods by 36% in Chile and Argentina.

Moreover, India and Latin America must reduce transport costs. Currently, India, unlike China, has no direct shipping services to this region. Goods have to be shipped first to Singapore or Europe, which increases both freight rates and shipping times. In the case of Brazil, for instance, shipping a product from Santos directly to Mumbai would take an estimated 27 days. Shipping via Singapore would take approximately 36 days, nine days longer.

The IADB report estimates that a 10% reduction in freight rates would likely boost imports of Indian goods by as much as 46% and 47% in Chile and Argentina, respectively.

Currently, high trade costs are preventing Latin America from reaping full benefits from its current trade with India and undermining the flow of investments between the two regions. Today a 1% growth in China’s GDP generates a 2.4% increase in this region’s exports to China. Meanwhile, a 1% rise in India’s GDP yields just a 1.3% growth in the region’s sales to the country.

“There is a policy action that can be taken in the short term: removing most obvious and costly obstacles to trade,’’ said IDB economist Mauricio Moreira Mesquita, who coordinated the study. “As trade brings these two economies together, the investment incentives between India and Latin America and the Caribbean will grow.”

The IDB study also calls for the two regions, which have signed numerous cooperation agreements covering 21 economic sectors in the past decade, to increase opportunities to exchange valuable development and economic lessons.

For example, India can provide important lessons based on its success in creating dynamic information technology services, burgeoning aerospace microfinance and pharmaceutical industries and top-notch universities to train its leaders, just to name a few areas. Latin America, on the other hand, can provide success stories in agriculture, mining, aeronautics, bio-fuels, private pension schemes and poverty alleviation programs, all of which could help India address some of its economic growth constraints.

The IDB study also identifies areas in which India could represent a competitive challenge for Latin America. Given the large size of India’s population and the political pressure to reduce poverty, the study argues that the country will likely specialize in labor-intensive manufacturing goods like China.

India has now just a fraction of China’s level of participation in US imports with a market share of 1.7% against China’s 22.3% in 2008. But India has been expanding its presence at an extraordinary pace, and its share is now bigger than those of Brazil and Central America, Latin America’s second- and third-largest exporters of manufactured goods.

In terms of low-technology goods, India has been boosting exports of textiles and apparel. It has now 3% of the U.S. market for these goods, which is twice that of Brazil’s (1.5%), higher than Central America’s (2.4%), and fast approaching Mexico’s dwindling share (7%).

“The manufacturing sector in Latin America and the Caribbean will have to prepare itself for another major competitive shock once India eliminates the barriers that are currently holding back labor-intensive exports,’’ said Moreira. “This scenario just increases the urgency for governments in the region to advance on their reform agenda to boost productivity”.

The study calls on Latin American and Caribbean governments to improve infrastructure, expand access to credit and promote greater and more efficient investments in education, science, and technology. These reforms will allow the region’s manufacturers to take advantage of their relatively large domestic market, the opportunities to process and industrialize natural resources and their proximity to the U.S. market to increase exports.

The study says that Latin America’s manufacturing of medium technology and resource-based goods, such as automotive products, are competitive against India’s, particularly in the U.S. market. It also says that India is likely to become more of a business partner rather than a threat to the region in the areas of information technology and specialized technical and business services.

Categories: Economy, Latin America.

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