As the IEDI has emphasized on many occasions, Brazil needs a greater and better insertion in international trade, diversifying its export basket and expanding the share of more complex products, besides importing goods to be re-exported after adding value to them. For this, we must aim for a better insertion in global value chains.

Strengthening our industrial capacities, promoting innovation, reducing the so-called “Brazil Cost” and signing trade agreements are fundamental in this process, as we argued in the document “Industry and Strategy for Socioeconomic Development in Brazil,” but there are also other less debated issues, such as the infrastructure and logistics deficiencies that hinder trade with our neighbors and also with other parts of the world.

Despite our national specificities, it is worth noting that, on average, Latin America is poorly integrated into world trade. The current moment is opportune for the region to advance more in this direction in a strategic way, since it is far from the areas of greater geopolitical tension and has important attributes, such as abundant energy sources, including clean energy, and critical mineral reserves. It is a context which, if made the most of, can put the region in a prominent position in the global productive reconfiguration.

This Letter IEDI deals with the obstacles to Latin American integration into world trade through a recent IMF study entitled “Constraints on Trade in the LAC Region,” by Rina Bhattacharya and Samuel Pienknagura.

In addition, we seek to deepen the discussion on one of the factors identified by the IMF study, using previous work by the IDB on the impact of infrastructure deficiencies on Brazil's foreign trade. Although the analysis is already a few years old, the persistent lack of investment in infrastructure suggests that the problem is far from being overcome. 

The IMF researchers find that there is a widespread perception that Latin American countries, and not just Brazil as many think, are significantly less integrated into global markets than other emerging and developing countries, despite efforts to reduce trade barriers. 

In general, Latin American countries have lower levels of intra-regional trade and tend to have exports concentrated in a relatively small number of products, especially low value-added commodities. In addition, the region lags behind in terms of participation of small and medium-sized enterprises in international trade. Evidence for Brazil was addressed in Letter IEDI n. 1219 “Overview of Brazilian Exporting Companies.”

This lower integration inhibits the potential role of international trade as an inducer of development in Latin America and the Caribbean, emphasize the Fund's researchers. 

Major trade restrictions in the region have changed over time, according to the IMF. Between the 1960s and 1990s, protectionist trade policy measures (tariffs, quotas, exchange restrictions, etc.) prevailed. From the 1990s, however, this situation began to change with a process of trade liberalization in several countries in the region, significantly reducing trade costs. 

The IMF researchers argue, then, that from the 2000s, a new set of trading costs in Latin America and the Caribbean began to matter, due to deficiencies in transport and logistics infrastructures and customs clearance, becoming the main obstacles to trade expansion and economic integration in the region. 

According to the researchers, several empirical studies carried out between 2000 and 2010 found evidence that poor roads, slow customs procedures and lack of information on international markets imposed major restrictions on the export performance of companies operating in the region.

Examining trade volumes in Latin America through an econometric model that considers up to 38 variables, the IMF researchers found that, with the exception of services, the region as a whole has trade volumes consistent with its economic, geographical and cultural characteristics. 

However, they argue that this aggregate empirical result masks significant heterogeneity in its different sub-regions —South America, Central America, Mexico and the Caribbean— as well as in the types of products traded (goods, services, manufacturing and commodities).

Therefore, the authors expanded the model by including new variables. First, they examined whether trade policy variables, related to tariff and non-tariff barriers, can help explain any trade underperformance in sub-regions.

Next, the authors included several proxies for (a) the quality of transport infrastructure and customs clearance, (b) the availability and quality of factors of production, and (c) the quality of governance, with a view to capturing the importance (or not) of these three sets of factors for commercial performance. 

The analysis of the results suggests that the main obstacle is intraregional. Trade in goods between the region and the rest of the world is lower than it should be according to the economic and geographical factors that characterize it, but this result is not statistically significant. Intraregional trade, on the other hand, is low and statistically significant. 

In South America, to which Brazil belongs, the evidence shows a significant "sub trade" of manufacturing goods and services, that is, exchanges are below the reference value obtained by the study’s model from the economic and geographical characteristics of the region. 

Much of this, according to the work, is due to transport conditions and customs regulations inserted in the model from both the World Bank's Logistics Performance Index (LPI) and the World Bank's Enterprise Surveys (WBES), which expresses the assessment of companies. In the latter case, the variables for transport and customs clearance fully explain the "sub trade" in industrial products

As the IMF researchers' analysis does not provide specific information about Brazil, this Letter IEDI also goes back to a study by the Inter-American Development Bank (IDB) entitled “The Ignored Obvious: Domestic Transport Costs and Regional Export Disparities in Brazil,” by Mauricio Mesquita Moreira and Cecília Heuser. 

In this study, the authors sought to quantify the impact of deficiencies in transport and logistics infrastructure on Brazilian foreign trade. The results of the empirical analysis show that the impact of transportation cost is not negligible: 

 •  A 1% reduction in transportation costs would increase exports by up to 5% in agriculture, up to 4% in manufacturing, and up to 1% in mining. 

 •  A 10% reduction in transportation costs would increase the number of products exported by between 4% and 7%.

The authors also warn that these numbers may be underestimated, since the estimates do not capture the indirect effects of transport costs on total production, nor the fact that rises in exports also tend to decrease transport costs due to economies of scale and incentives to improve infrastructure, generating a virtuous circle.

The evidence from the studies covered in this Letter IEDI indicates additional benefits from the resumption of infrastructure investments in Brazil and the rest of Latin America and the Caribbean. 

Investing more in infrastructure is important to maintain GDP growth and also to improve the supply conditions of the economy, giving competitiveness to national output— as the IEDI has been emphasizing, such as seen in Letter No. 1089 "The role of infrastructure in the recovery of Brazilian economy." 

Investing in infrastructure is also a lever for international trade and insertion in global value chains, especially when it comes to logistics, but also energy, since Latin America's clean energy potential may become a significant competitive advantage for its exports.

The full text is available in Portuguese