Paraguay Central Bank Statement

Author: | Published: 5 Sep 2017
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By the end of 2016, signs of global economic improvement pointed to an optimistic trade outlook. This news for Latin America could not come at a better time as the region became a bearer of bad news dealing with (and will probably continue to deal with) lower commodity prices and higher external financing costs relative to the previous decade. However, recent events in advanced economies triggered new risks for trade integration as a more protectionist stance is being fostered in some of these countries. In this scenario, Latin American countries must embrace this as an opportunity to strengthen trade relations within the region and consider the potential benefits not currently being exploited.

Historically, intra-regional trade in Latin America (LA) has remained relatively low when compared to other regions. Around 80% of exports have been destined to other regions since the 1990s. In contrast, for example, in the East Asia and Pacific (EAP) region almost 50% of their exports have been intra-regional. This may partially explain the significant income growth that these countries experienced in the last 25 years, boosting their catch-up process with high-income economies. Their experience suggests to LA policymakers that actions to reinforce regional trade ties must be a priority.

One crucial feature that could motivate strengthening integration is the fact that LA countries exhibit complementarities. To illustrate this, when considering the top 10 products exported by countries from Mercosur, eight are food, while eight of the top 10 products exported by countries from the Pacific Alliance are mainly minerals, fuel and machinery. This indicates that these economic blocs do not share the same comparative advantages. It might be beneficial for both parties to deepen their trade relations.

In this regard, Paraguay has made some progress, gradually becoming part of the regional value chain through the maquila regime. In the last years, Paraguay has been developing this sector, which grew on average 24% in the 2014-2016 period. More than 80% of its exports have been destined to LA countries, mainly Brazil. This has represented not only new trade ties with the region but also an opportunity to diversify the country's export basket and to develop labour intensive industries.

While the challenge of reaping the benefits of integration has acquired more importance given emerging protectionism, it does not imply that the region should neglect its trade flows with other regions. On the contrary, closer ties among LA countries should also be directed towards building a joint strategy to become a more competitive region in global markets. The strategy must be coupled with investment in infrastructure and logistics and reducing nontariff trade frictions in each country to promote region-wide efficiency gains.

As protectionism increases in advanced economies, further regional economic integration may become the golden key to foster economic growth in LA countries. This is particularly important for small open economies like Paraguay, which acknowledges that regional trade is crucial for product and market diversification of its export basket. Our country is aware that the region as a whole will always outperform the sum of each country's individual efforts. So, by building a strong neighbourhood, our countries will be able to successfully access the most competitive and demanding global markets.




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