The 10th China-LAC Business Summit, organized by the Inter-American Development Bank (IDB) and the China Council for the Promotion of International Trade (CCPIT) will start this Friday, October 14, in Tangshan, China. The summit aims to strengthen and expand trade relations between China, Latin America and the Caribbean (LAC) with panel discussions by business executives and government authorities and one-to-one business meetings.
It is a good opportunity to discuss trade relations between China and LAC.
The strategic importance of China as a trade and investment partner for LAC is undeniable. Chinese investors are expected to play an active role in the infrastructure concessions that LAC governments are planning to put out to tender in the next months.
In terms of trade, following the end of the commodities super cycle, the great challenge facing LAC is how it can diversify its exports to China and add value to them, particularly in the area where it is most competitive: agribusiness. Supply is increasingly restricted by the relative lack of arable land and water, while demand is on the rise due to growth in per-capita income and urbanization, both of which suggest that the end of the cycle is exactly what its name suggests — a brief hiatus in an upward trend for food imports. As a large, competitive agricultural producer, LAC is in a position to increase supply and meet Chinese demand.
However, it will be hard for this to happen if the region does not adopt a more pragmatic, active trade policy, one that is fundamentally guided by technical assessments of the main obstacles it is facing.
A new IDB study shows that it will be difficult to repeat the easy gains of the past. China is imposing, for example, a wide range of tariff and nontariff barriers that seriously limit the growth, diversification, and sophistication of LAC’s exports.
The import duties on Latin American and Caribbean exports of agricultural products and manufactures reach a weighted average of between 17% in Argentina and 16% in Mexico for agricultural exports and 13% in Argentina and 9% in Brazil for manufactured exports – or almost double the OECD average.
China’s tax policy and its subsidies also hamper LAC’s agricultural exports, although less visibly so than import duties. This tax policy creates a significant extra level of protection, in that local producers are exempt from value-added tax (VAT). The OECD lists 124 active subsidy programs, which range from payments based on the use of inputs to payments based on planted area, the type of animal being raised, or yields. It is estimated that, in 2014, these subsidy programs reached US$54.2 billion, which represents 4% of agricultural output. This is a considerable amount, but it is still substantially lower than the revenue lost as a result of VAT exemption. The latter could be as high as US$1.1 trillion, the equivalent of 13% of agricultural output, assuming it is fully implemented.
As if the major hurdles that subsidies and tariffs represent weren’t enough, agricultural exports are also up against an even more complex challenge: nontariff barriers (NTBs), which include technical measures (sanitary and phytosanitary measures and standards) and nontechnical measures (state trading, tariff quotas, and price controls).
The impact of these measures can be calculated by analyzing the difference between the domestic and international prices for agricultural products in China, known as a price differential or nominal protection. Although import duties and subsidies continue to be high, they dropped significantly after China joined the WTO in 2001. However, the price differential has been growing almost exponentially since 2008. This change can only be explained by the increasing relative importance of NTBs. In 2014, the price differential for agricultural products reached 24% (in other words, prices in China were 24% higher than on the international market), compared with an average tariff of 13.4%. This price differential is particularly relevant for LAC’s key export products, such as beef and chicken.
Our estimates suggest that if the frequency and scope of the technical barriers China imposes were reduced to OECD levels (which would imply halving them), Latin America’s agricultural exports would increase by between 13% and 17%. Brazil and other Latin American countries, such as Argentina, Chile and Uruguay, have already made headway in this area as a result of the opening up of the Chinese meat market and the growing number of plants approved for export. However, this progress is far from overcoming existing restrictions. For example, while Brazil managed to get 16 beef plants approved for export to China, its main international competitors, such as Australia and New Zealand, already have between 40 and 50 approved plants.
These challenges can only be overcome if the LAC governments take a professional and technical approach to defining its trade policy objectives, particularly in relation to the Chinese market.
The majority of countries in Latin America lack robust institutional infrastructure that encompasses the government, the private sector, and academia and would be able to produce and analyze a critical mass of trade intelligence. This is not just about trade promotion, important though that is. Government technicians and academics need to be able to invest in collecting and analyzing data in relation to trade barriers — data which is hard to access in most Asian markets — so as to be able to make informed trade policy decisions. Continuing to make decisions on the basis of ideology or subjective perceptions implies condemning the region to missing out on valuable opportunities for diversifying its exports and increasing the sophistication of these.