Abstract

Latin America has witnessed impressive economic growth since 2003. The average annual growth of the gross domestic product (GDP) for Latin America has been 5% for the 2003-2007 period, the highest in three decades. Trade performance has been one of the essential factors in explaining this growth. The purpose of this article is to analyze the main elements of Latin America's trade performance from the 1990s until recent years and to explain whether global demand and economic reforms of the 1990s helped strengthen the role of the region's trade sector.

Introduction

Latin American countries have had both a positive and negative relationship with the global economy. After their independence around the beginning of the nineteenth century, most of them were involved in the first period of globalization. During this first era of globalization, Latin America based its economic growth on trade of basic commodities with Europe (for some countries, exports represented more than 60% of GDP). With World War I and the Great Depression, international prices of commodities fell, affecting the Latin American countries. An inward-looking economic model known as import substitution industrialization (ISI) was pursued to eliminate industry's growing dependence on imports and the negative impacts of external shocks from the global economy. Although ISI was crucial in the construction of a manufacturing industry for countries such as Mexico, Brazil, and Argentina, there were also inconsistencies in industrial and trade policies. In the end, this had consequences for the whole economy.

Latin American countries began a process of trade liberalization after several stabilization programs. The positive numbers in the trade account (exports minus imports) during the first years of the twenty-first century were the result of two factors. The first was the economic reforms whereby exports were again the growth engine during the 1990s. The second factor was the fact that the positive global economic conditions enhanced commodity prices, which made Latin America again dependent on the volatilities of the foreign market.

Trade Liberalization Process

This section covers the main elements of Latin America's trade liberalization process that started for most countries in the 1990s. It will give a perspective on how economic reforms transformed the trade sector where exports had become the main engine of growth.

Theory

Regarding the potential benefits of trade liberalization, Krugman and Obstfeld (2000) stated that an economic opening through tariff reduction eliminates distortions for consumers and producers with the consequent increase in national welfare. An increase in competition through the supply of imported goods in the domestic market pushes prices down with direct benefits for consumers. Dornbusch (1992) pointed out that trade liberalization brings potential dynamic benefits, for example, through the introduction of a new method of production, the opening of a new market, or the carrying out of new production methods. With the same approach, Rodrik (1999) affirmed that benefits from opening markets are not on the side of exports but rather on the side of imports. According to him, developing countries can benefit from imports of capital and intermediate inputs that are too expensive to produce locally.

One of the main criticisms of free trade and its application to developing countries has been that models of free trade suppose perfect competition in the market. However, Latin America's industries are imperfect market structures. Therefore, selective tariffs on industries can prevent additional distortions in the economy. This is referred to ...