Politics, Business & Culture in the Americas

How to Protect and Defend Free Trade

If recession-wary governments succumb to protectionism, a decade of growth could be reversed. Here’s how to keep the momentum going.

The expansion of global trade in recent decades has contributed significantly to economic growth and poverty reduction throughout the Western Hemisphere. Fueling this trade expansion were two major structural changes in the global economy: the globalization of manufacturing processes and an unprecedented increase in the trade of services and outsourcing across borders. With the onset of the global economic crisis, however, global trade rapidly contracted by 36 percent, unemployment in many countries skyrocketed, and the prospect of protectionism returned to haunt high-income economies.

A decade of good fiscal management, strong commodity prices, growing foreign investment, and increased trade links with Asia left most countries in the region in a strong position to weather the crisis. The responses of most governments, which included both fiscal stimulus and monetary measures, have meant that on the whole Latin America and the Caribbean have fared relatively well in this latest downturn. The economic crisis and its aftermath may be raising doubts in some circles about the export-led growth strategies of recent decades. Instead, the governments of the Americas should focus on finding ways to maximize the benefits from trade and foreign direct investment while minimizing the downside risks.

Following is a suggested agenda for strengthening trade strategies:

Diversify Exports

Diversification of exports is a potent buffer against global economic volatility. Countries that rely heavily on a limited number of exports are fully exposed to external price shocks. This is true not only for oil, natural gas and minerals exporters, but also for economies reliant on areas such as tourism and agriculture. The stability and growth of several countries in the region have been supported by a rapid diversification of exports over the last 20 years. Nicaragua, Colombia and Mexico shifted from a reliance on narrow natural resources exports (principally coffee and/or oil) to a wider range of agricultural products and, critically, light manufacturing. The next step in the diversification agenda needs to go beyond manufacturing. Many countries now focus on services, including financial and professional services as well as transportation and tourism. Indeed, while trade in goods collapsed during the crisis, trade in services remained robust…

 

ENDNOTES

1.  Canuto, O., Haddad, M. and Hanson, G. 2010. Export-Led Growth 2.0. Economic Premise Number 3. March 2010. The World Bank.
2.  See, for example: Keesing, D. B. and Singer, A. 1991. “Development assistance gone wrong: failures in services to promote and support manufactured exports”, in Paul Hogan, Donald Keesing, and Andrew Singer eds., The Role of Support Services In Expanding Manufactured Exports in Developing Countries, Economic Development Institute, World Bank.
3.  Lederman, D., Ollareaga, M. and Payton, L. 2009. Export Promotion Agencies Revisited. World Bank Policy Research Paper Number 5125. The World Bank.


Tags: Economy, Free Trade, Jose Guilherme Reis, Market Access, Thomas Farole
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