India: Latin America's Next Big Thing?

Discussion in 'Economy & Infrastructure' started by LETHALFORCE, Aug 3, 2010.


    LETHALFORCE Moderator Moderator

    Feb 16, 2009
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    Reducing tariffs and non-tariff barriers such as costs can boost trade between India and Latin America
    With Latin American considering India as its next big business move, the analysis and findings clearly indicate that the fundamentals exist for a strong trade relationship between the two regions.

    Latin America and the Caribbean have the natural resources that India needs to grow and thrive. As was the case with China, this “natural resource pull” should be strong enough to generate strong bilateral trade executions. Aside from this factor, similarity in demand patterns provide another good reason to trade, particularly in manufactured goods aimed at these two economies’ vast low- and middle-income populations. The puzzle, then, is what is the hold up?

    A simple examination of the trade costs between the two economies offers a quick solution to this puzzle. Tariffs imposed on Latin America’s exports to India are close to prohibitive, particularly on agricultural products.

    Tariffs imposed on India’s exports to Latin America are not as high, but cannot be deemed harmless either. If these already formidable obstacles are added, the hard-to-quantify-but-no-less-damaging non-tariff barriers and high costs of shipping goods between the two economies, the answer to why it has not happened yet appears obvious.

    Despite frequent declarations of commitment to trade and integration, governments on both sides of the relationship have yet to effectively address the most obvious and serious obstacles to bilateral trade. Trade agreements have been signed between India and Latin America partners such as Mercosur and Chile, however, the limited scope of these initiatives conspires to severely reduce their effectiveness.

    Unless they incorporate more Latin America countries and substantially expand the number of products covered, they are not going to solve the paradox of the “missing trade.” Moreover, they can address only part of the trade costs. An effective trade agenda must also bring transport costs down by working on a regulatory framework that promotes investment and competition in transport services between the two economies.

    Without reducing trade costs it is hard to be optimistic about bilateral investments. Despite the recent boom in outward FDI from both India and Latin America, a very small proportion of these investments has gone to reinforcing the bilateral relationship. There have been a few emblematic examples in IT services, mining, and manufacturing, and these might be revealing of the relationship’s potential. However, such examples have been exceptions rather than the rule.

    The bulk of Latin America’s and India’s outward FDI goes to their major trading partners in the United States, Europe, and Asia, and this is far from surprising. Trade brings economies together, making the incentives to invest clearer and the barriers, particularly the informational barrier, less relevant. Without a critical mass of trade, the prospects for bilateral investments between Latin America and India appear dim.

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