Trade: In the Midst of an Economic Crisis
Trade: In the Midst of an Economic Crisis
Mexico’s former undersecretary for international trade negotiations looks at how free trade can help Latin America to reignite economic growth.
Sharp contraction in the U.S. economy has hit Latin America where it hurts the most: in shrinking trade volumes. The so-called “vacuum cleaner effect,” or, the drying up of liquidity resulting from the collapse in U.S. credit markets, combined with decreased aggregate demand, has affected even the best-managed economies. The result is no surprise: falling trade numbers from around the region.
Lower trade volumes are not limited to
In sharp contrast with the
Latin American countries will have to choose from a menu of unappetizing policy measures to deal with the fall in aggregate demand and the difficulties in financing current account deficits. The four likely choices include: voluntary reduction of consumption, investment or government spending; involuntary reduction of consumption and investment through currency depreciations; deployment of international central bank reserves; and improved country risk profile—through painful structural reforms—to reverse the fall in FDI and portfolio investment and avoid a sharp adjustment in employment and GDP growth.
Trade policy is the key to overcome the crisis. Latin American countries should defend free trade, building on the vocal role played in their opposition to the Buy American provisions in the original
There are other creative ways that
Trade liberalization—allowing imports from multiple countries—should be the goal. For instance, Latin American Integration Association members could agree to cumulate inputs among them. Latin American countries could also propose an ambitious cumulation agenda to U.S. President Barack Obama and move forward with it as part of the Pathways to Prosperity forum. This would go a long way toward solving the conundrum of what to do with the dormant Free Trade Area of the
The region’s two most powerful players—
But it is crucial they don’t stop there. These leaders must convince others in the Hemisphere—including the
Luis de la Calle is managing director at De la Calle, Madrazo, Mancera, S.C., and from 1999 to 2002 was Mexico’s undersecretary for international trade negotiations.