Latin American and Caribbean deep trade agreements and services in GVCs

Latin America and the Caribbean is stable over time, so there is no evidence that the region’s countries on the whole are shifting their involvement in services GVCs in one direction or the other.

In sum, GVC integration in services markets is underdeveloped in the Latin American and Caribbean region compared with other parts of the developing world, particularly for intraregional trade. There is no clear evidence of increasing integration between 2000 and 2015; there is even a slight regression, contrary to the experience of most other regions. Although individual Latin American and Caribbean countries and sectors differ, the overall picture is consistent: GVC integration is important for services trade in the region, but it does not yet approach the levels seen in most other developing regions.

By their nature, PTAs affect trade costs and thus trade flows among partners as well as between partners and nonpartners. But can PTAs have impacts on the production-sharing model at the base of GVC trade? In services in particular, is there scope for lower trade costs linked to a PTA to translate into deeper GVC integration?

Before moving to concrete issues in Latin American and Caribbean PTAs, a simple thought experiment using a quantitative trade model is useful. The model, described in full in Shepherd (2020), is based closely on Aichele and Heiland (2018) and Caliendo and Parro (2015). It uses standard economic theory and explicitly incorporates production sharing across countries. As such, it makes it possible to simulate the impact of a change in trade costs—for example, as a result of signing a PTA—on intraregional and extraregional trade flows as well as on the level of backward and forward integration in those trade flows.1

In a trade costs measure that takes into account all the factors that drive a wedge between factory prices in the exporting country and consumer prices in the importing country (including geographical and historical factors as well as policy barriers), trade costs in services sectors are systematically higher than in goods sectors (Novy 2013), as shown in figure 5.10.2 The difference is substantial: services trade costs are often 50 percent higher than goods trade costs, and even double in some cases.

For the Latin American and Caribbean region, somewhat unusually, trade costs are lowest when trading with North America, not when trading within the region. This result is in line with the GVC analysis presented above: intraregional GVC integration was low compared with other directions of trade, and high intraregional trade costs could be part of the reason. So, policy could have a role in further reducing services trade costs given the large cost gap relative to goods trade and the fact that the intraregional flows that travel the shortest distance do not have the lowest trade costs.