1. china's opportunity for latin american trade: dichotomies · economies from global value...
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Avendaño & Dayton-Johnson - 1
Central America's China Trade: Too Little, Too Late?
Rolando Avendaño, OECD Development Centre
Jeff Dayton-Johnson, Monterey Institute of International Studies
April 2013
1. China's Opportunity for Latin American Trade: Dichotomies
There is a view, perhaps oversimplified, of the implications of China's rapid growth and
industrialization for Latin America and the Caribbean. In this view, the countries of the region
fall into two categories. On the one hand, there are the commodity-exporting South American
countries, whose export performance weathered the Great Recession beginning in 2008 thanks to
vigorous Chinese demand for their exports. Indeed, it was in large part due to this demand that
Latin America had enjoyed so spectacular an economic bonanza during the pre-crisis years 2003-
2008.1 On the other, there are countries whose export basked resembles that of China, and
increasingly suffer from Chinese competition in third-country markets. This second group of
countries, moreover, depends critically on the United States market for their exports, so battered
by the financial crisis. (Additionally, the second group of countries competes with China for
foreign direct investment.) This second group of countries has had to cope with a much higher
level of competition, affecting their productive capacity and in the long run excluding these
economies from global value chains and productive upgrading. Brazil and Chile are good
examples of the first group; Mexico of the second (see fig. 1 below for evidence on manufactured
exports).
Others see the dichotomy differently. The economies buoyed by Chinese demand for primary
products are foolhardily postponing a necessary diversification of their productive structure and
their export basket.2 The manufactures exporters nearer to the United States, meanwhile, despite
1 Latin America's experience during the financial crisis beginning in 2008 is analyzed in OECD (2009).
2 This is a view most consistent with a long series of publications by the U.N. Economic Commission for
Latin America and the Caribbean.
Avendaño & Dayton-Johnson - 2
their troubles during the recession, have chosen the better long-term strategy.
Where do Central American countries fit in these dichotomies? The question is not frequently
posed, but the answer could be important to policy makers in the countries of the isthmus. In
particular, if breakneck Chinese growth, and its associated demand for commodity exports, can
serve as a motor for economic growth elsewhere in the developing world, few parts of Latin
America stand in greater need of such a motor than the largely poor Central American economies.
On the other hand, if a dependence upon primary-product exports condemns an economy to
perpetual underdevelopment, then perhaps Central American policy makers should look askance
at this putative opportunity.
Figure 1. Share of manufacturing exports and GDP per capita
Note: Average values, 2009-2011.
Source: World Development Indicators, World Bank.
Central American countries are poorer and rely more on commodity exports than the average
Latin American country (fig. 1). That is, Central American countries have, in general, per-capita
income levels below the Latin American average, though Costa Rica and Panama are exceptions.
And Central American countries' export baskets have lower shares of manufactured goods than
BRA
CHL
CRI
SLV
GTM
HND
LAC
MEX
NIC
PAN
0
10
20
30
40
50
60
70
80
0 2000 4000 6000 8000 10000 12000 14000 16000
Man
ufa
ctu
res
exp
ort
s (%
of
me
rch
and
ise
e
xpo
rts)
GDP per capita, PPP (constant 2005 international $)
Avendaño & Dayton-Johnson - 3
the Latin American average, though here El Salvador and (again) Costa Rica are exceptions.
This chapter explores the trade relationship between China and the Central American countries
(which, for the purpose of this chapter, includes Costa Rica, El Salvador, Guatemala, Honduras,
Nicaragua, and Panama). These economies, with the exception of Costa Rica and Panama, are
among the very poorest in the Latin American region. A quantitative assessment of trade patterns
is followed by a discussion of public policies and development strategies that could help leverage
those opportunities and minimize the threats posed by China. Does Central America have the
worst of both worlds: namely, a heavy reliance on primary product exports without a vigorous
Chinese demand? The answer, it turns out, is almost but not quite.
Moreover, we discuss whether Central America's feeble Chinese trade has been depressed by the
sub-region's role in the diplomatic rivalry between mainland China and Taiwan: all Central
American countries, until Costa Rica broke from the pack in 2007, officially recognized and
maintained diplomatic relations with only Taiwan. Given that the cross-straits relationship has
also changed significantly since the election of a KMT administration in Taiwan in 2008, we also
address the prospects for change in the diplomatic relationship between Central American
countries and the People's Republic, insofar as it is linked to the future of trade.
Finally, the chapter also explores the implications of rapid Chinese growth for development
strategies and public policy in Central American countries.
2. Central American Trade and China: A Descriptive Analysis
In this section we situate Central American countries in the Latin American-Chinese trade
dichotomies mentioned above: fast-growing exporters of primary products to China, or slow-
Avendaño & Dayton-Johnson - 4
growing manufactures, competing with China?3 Both types of economies certainly exist in the
wider region but the evidence for Central American countries paints a fairly heterogeneous
portrait.
3 There are by now many analyses of the economic relationship between China and Latin America, to
which this volume seeks to contribute new perspectives. Earlier publications include Santiso (2007), Fung
and García Herrero (2011), Gallagher (2012), Hearn and León-Manríquez (2011).
Avendaño & Dayton-Johnson - 5
Figure 2. Average Rate of per Capita GDP growth in Latin America:
2003-2008 and 2009-2012 (e)
Source: Based on National accounts, 2012.
Economic growth rates in Central American countries during the pre-crisis period were relatively
high compared with the seven largest economies of Latin America (fig. 2). Rates of per-capita
income growth in Panama, Honduras and Costa Rica between 2003 and 2008 exceeded 4% (and
nearly reached 10% in the case of Panama). Most of the LAC-7 countries similarly experienced
growth rates of GDP per capita above 6%. On the contrary, the post-crisis years have proven
more difficult for several economies in Central America. Guatemala, Honduras and Nicaragua
were the most affected, with growth rates in GDP per capita below 2%. Among LAC-7 countries,
only Venezuela has experienced similarly depressed growth after 2009. The cyclical component
of Central America’s growth -- its response to the global crisis -- has nevertheless differed little
from the remainder of Latin America, or from other developing economies.
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Argentina Brazil Chile Colombia Mexico Peru Venezuela
Average 2003-08 Average 2009-2012(e)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
Costa Rica El Salvador Guatemala Honduras Nicaragua Panama
Average 2003-08 Average 2009-2012(e)
Avendaño & Dayton-Johnson - 6
Figure 3. Exports of Goods and Services in Central America 2000-2011
Percentage of GDP
Source: UN Comtrade, 2012.
In contrast with the average Latin American economy, the share of exports of Central American
countries is higher (fig. 3). Since the beginning of the 2000s, total exports in Latin America have
represented about 20-25% of the total output. In the case of Costa Rica (47%), Honduras (60%)
and Panama (79%), this share has been more important, illustrating one important difference with
other economies in the region: small economies in Central America are more open, and therefore
more vulnerable to trade shocks. The export share of Latin American economies -- Central
American countries among them -- has moreover not grown much in the first decade of the new
century. But the composition and destination of exports has changed substantially for some
countries in the region.
0
10
20
30
40
50
60
70
80
90
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Costa Rica El Salvador Guatemala HondurasNicaragua Panama LAC7
Avendaño & Dayton-Johnson - 7
Figure 4. Exports to China as Percentage of Total Exports, 2000 and 2010
Source: UN Comtrade, 2012.
While the effect of China’s increasing demand for Latin American goods has not dramatically
modified the contribution of exports to GDP in Central America, it is illustrative to compare the
exports to China as a share of total exports across different countries (fig. 4). Chile, Peru and
Brazil have tightened their trade bonds with China, with a much higher contribution of Chinese
imports in their total exports. Currently, more than of 50% of Chilean copper is destined to satisfy
China’s demand for this metal for infrastructure development, construction, industrial equipment
and transportation. In contrast, the export profile of Central America’s core economies makes that
the share of exports to China minuscule: only Costa Rica, and to some extent Panama, have
increased their exports to China, though these shares hardly reaching 5% of total exports.
0
5
10
15
20
25
30
CostaRica Guatemala Honduras Nicaragua Panama ElSalvador
2000 2005 2010
0
5
10
15
20
25
30
Argen na Brazil Chile Colombia Mexico Peru Venezuela
2000 2005 2010
Avendaño & Dayton-Johnson - 8
Figure 5a. Main exported products as share of total exports in Central America
2000-2011
Source: UN Comtrade, 2012. Nomenclature SITC Revision 3.
Figure 5b. Disaggregated information on exports in Central America, 2011
Source: UN Comtrade, 2012. Nomenclature SITC Revision 3.
Just as Central American exports have grown little (as a share of GDP) over the last decade, so
too the composition of export baskets has remained fairly stagnant (fig. 5a). For all six countries,
the four main exports by country remained the same between 2000 and 2011. Coffee exports
maintain a similar share of exports for coffee-exporting countries (Guatemala, Honduras, El
Salvador). More interestingly, the share of manufactured goods has increased in Costa Rica and
0.0
5.0
10.0
15.0
20.0
25.0
Manuf. goods
Non-trad. agricultural
Bananas Coffee
Costa Rica
2000 2011
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Non Traditional
Maquila Coffee Sugar
El Salvador
2000 2011
0.0
5.0
10.0
15.0
20.0
25.0
Coffee Sugar Bananas Oil
Guatemala
2000 2011
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Coffee Bananas Seafood Gold
Honduras
2000 2011
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Manuf. products
Agr. produce Minerals Fishing produce
Nicaragua
2000 2011
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Bananas Shrimp Sugar Coffee
Panama
2000 2011
0
0.02
0.04
0.06
0.08
0.1
0.12
Costa Rica
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.1
Sugar Coffee Women/g blouses
Precious metal ore
Banana
Guatemala
0
0.05
0.1
0.15
0.2
0.25
Coffee Printed matter
Banana Gold Palm oil
Honduras
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
Coffee Beef Gold Crustaceans, frozen
Sugar
Nicaragua
0
0.02
0.04
0.06
0.08
0.1
0.12
Panama
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
El Salvador
Avendaño & Dayton-Johnson - 9
Nicaragua, while maquila exports in El Salvador have fallen. This composition illustrates the
heterogeneity of Central American countries vis-à-vis Chinese competition. Whereas Guatemala,
Honduras and Panama can be certainly considered commodity exporters, the export profile of
Costa Rica, El Salvador and Nicaragua is more diverse, including both commodities and
manufactured goods. Product-level information regarding the leading exports confirms the
importance of primary products even in the more manufacturing-oriented economies of the region
(fig. 5b).
Figure 6.
Note: The Herfindahl-Hirschman index is estimated as the squared sum of market shares of exports of country i to country j on all 4-
digit levels of goods, corrected by the number of exported goods. Nomenclature SITC Revision 3, 2012. Source: OECD Development Centre, based on UN Comtrade.
How dependent are countries in the region on a single export, or a small number of exported
goods? A more detailed estimation of export concentration provides the level of product
concentration (or specialization) that characterizes Central American economies (fig. 6). In this
regard, most countries in the region have maintained low levels of concentration: that is to say, a
more diversified basket of commodities (as is the case for El Salvador, Guatemala and Honduras)
compared with oil/mineral exporters (Venezuela, Chile). As we will see below, a low level of
0
0.1
0.2
0.3
0.4
0.5
0.6
Vene
zuel
a
Bol
ivia
Ch
ile
Par
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ay
Col
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a
Ph
ilip
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re
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ted
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Low
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nce
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.
H
igh
co
nce
ntr
.
Latin America Herfindahl-Hirschmann Index by Product2000 vs 2010
2000
2010
Avendaño & Dayton-Johnson - 10
product concentration in exports is desirable, but not sufficient, for economic development.
Figure 7. Main destination of Central American exports
2000-2010
Source: UN Comtrade, 2012. Nomenclature SITC Revision 3. Data for Costa Rica corresponds to 2000 and
2009.
A second question regarding exports concentration refers to diversification of trading partners.
The dominant role of the U.S. as the main importer of Central American goods (fig. 7) has not
diminished during the last decade.4 Indeed, the U.S. has become even more important as an
export destination for Nicaragua and, to a lesser extent, Guatemala. Costa Rica, El Salvador and
Panama, meanwhile, have increased export shares to other partners: neighboring countries,
Europe (Netherlands, Germany) and, marginally, China. In contrast to this, for most LAC-7
economies China has become a strategic destination of their exports (fig. 4).
4
Bulmer Thomas (1987) provides a historical overview of the development of Central America's
commodity-based export structure, and of the role of the U.S. as its principal export destination.
0.0
10.0
20.0
30.0
40.0
50.0
60.0
US Netherlands Panama China
CostaRica
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
US Guatemala Honduras CostaRica
ElSalvador
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
US ElSalvador Honduras Mexico
Guatemala
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
US Guatemala Germany UK
Honduras
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
US ElSalvador Canada Venezuela
Nicaragua
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
US Honduras Japan SouthKorea
Panama
Avendaño & Dayton-Johnson - 11
Figure 8. Main destination of Central American exports, 2000 and 2010
Note: Herfindahl-Hirschman index is estimated as the squared sum of market shares of exports of country i to
country j on all 4-digit levels of goods, corrected by the number of exported goods. Nomenclature SITC
Revision 3, 2012.
Source: OECD Development Centre, based on UN Comtrade.
The low concentration of trade partners for Central American countries is also captured
in the Herfindahl-Hirschmann index, computed by export destination (fig. 8). This
indicator gives us an estimation of the number and distribution of exports among trade
partners with each country. Whereas Mexico is highly concentrated, in terms of
destination, with more of its exports targeting the U.S., Honduras, Guatemala, Panama
and Nicaragua exhibit much lower levels of dependence on a single trade partner, in a a
range similar to that of the average Latin America economy. In fact, export concentration
(by destination) decreased between 2000 and 2010 for Latin America as a whole.
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
Mex
ico
Ven
ezu
ela
Ho
nd
ura
s
Gu
atem
ala
Ecu
ado
r
Pan
ama
LAC
ave
rage
Co
sta
Ric
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Co
lom
bia
Bo
livia
Nic
arag
ua
Par
agu
ay
Per
u
Gu
yan
a
Uru
guay
Ch
ile
Arg
enti
na
Bra
zil
Latin America Herfindahl-Hirschmann Index by Destination2000 vs 2010
2000
2010
Avendaño & Dayton-Johnson - 12
Figure 10. Evolution of Export competition with China for Central American
countries, 2000-2009
Note: CS and CC coefficients calculated with exports of country i and exports of country j (China). The coefficient of
specialization (CS) and coefficient of conformity (CC) are measures of the level of trade competition between two
economies. The competition level is determined by the similarity of export baskets between these countries, with
competition being high (tends to 1) when export structures are similar, and competition being low (tends to 0) when
export structures are complementary.
Source: OECD Development Centre, based on WITS Database, 2012
A closer look at the trade competition patterns between Central America and China is provided
by comparing their trade structures at a disaggregated level. That is, how similar are countries'
export baskets to that of China? Average trade competition of Central American countries with
China is relatively low: Costa Rica, El Salvador, Guatemala, Honduras and Panama all show
more complementarities than competition with China’s exports basket (fig. 10). (More recent
indicators for trade competition from 2010 (fig. 11), illustrate this same result: in comparison
with other emerging regions -- notably Central Europe and East Asia -- competition for Central
American countries with China is low).5
5 More detailed analysis of Latin America's comparative export structure, using the CC and CS indexes, can
be found in OECD (2007), ch. 4.
0.0
0.1
0.2
0.3
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0.5
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0.7
0.8
Thaila
nd
Hungary
Kore
a, Rep.
Mexi
co
Mala
ysi
a
United S
tate
s
Cze
ch R
epublic
Sin
gapore
Rom
ania
Indonesi
a
Turk
ey
Pola
nd
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es
Bulg
aria
Cro
atia
Japan
India
Slo
vak R
epublic
Spain
Cost
a R
ica
Pakis
tan
Bra
zil
El S
alv
ador
Colo
mbia
Guate
mala
Arg
entina
Peru
Uru
guay
Hondura
s
Russ
ian …
Panam
a
Chile
Boliv
ia
Venezu
ela
Para
guay
Low
com
pet. H
igh c
om
pet.
Avendaño & Dayton-Johnson - 13
Figure 11. Export Competition with China for selected countries (2010)
Note: CS and CC coefficients calculated with exports of country i and exports of country j (China). The coefficient of
specialization (CS) and coefficient of conformity (CC) are measures of the level of trade competition between two
economies. The competition level is determined by the similarity of export baskets between these countries, with
competition being high (tends to 1) when export structures are similar, and competition being low (tends to 0) when
export structures are complementary.
Source: OECD Development Centre, based on WITS Database, 2012
Central America and China have complementary export baskets; several of the Central American
countries are primarily commodity exporters. Could Central American economies benefit from
China’s rapidly increasing demand for goods? This requires an explicit analysis of the
compatibility of Chinese imports and Central America’s main exports. The picture that emerges is
not very encouraging.6 Honduras, Panama and Costa Rica export goods substantially different
from those imported by China. There are few potential complementarities to be exploited for
these countries by targeting Chinese markets (fig. 12).
6 The estimation is a modified version of CS and CC coefficients, taking into account the imports of the
Chinese economy, and comparing the similarity with Central American exports.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Cze
ch R
ep
ub
lic
Ro
man
ia
Slo
vak
Re
pu
bli
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Ko
rea,
Rep
.
Po
lan
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Jap
an
Hu
nga
ry
Th
ail
an
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Mex
ico
Ph
ilip
pin
es
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Cro
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Turk
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Spai
n
Sin
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Un
ited
Sta
tes
Co
sta
Ric
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Bu
lgar
ia
Ind
ia
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alva
do
r
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ista
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Indo
nesi
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Bra
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Arg
en
tin
a
Gu
atem
ala
Ch
ile
Per
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lom
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Bol
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Pa
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Par
agu
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Ve
ne
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la
Low
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mp
et.
Hig
h c
om
pe
t.
Avendaño & Dayton-Johnson - 14
Figure 12. Trade opportunities with China (2000-05)
An additional dimension, not considered in the previous estimations, is the level of intra-industry
trade in Central American economies. Intra-industry trade refers to the volume of exchange of
products belonging to the same industry. The level or potential level of this kind of exchanges is
not captured by the CS and CC indexes analyzed above. Moreover, CS and CC indexes do not
necessarily reflect the differences in size when comparing two economies, certainly relevant in
the consideration of China and any Central American country. The Vollrath index is a measure
of comparative advantages taking into account intra-industry trade. It measures each country’s
exports and imports relative to global exports and imports in each sector. Values above 1 indicate
a comparative advantage for the country in that specific sector. Table 1 summarizes these results,
highlighting in red the sectors when comparative advantage is higher.
Avendaño & Dayton-Johnson - 15
Table 1. Vollrath index of comparative advantage in selected
Latin American countries
2000 – 2010
Source: Authors’ calculation, based on Comtrade (2013).
Table 1 illustrates and confirms the specialization pattern that countries like Chile, Colombia,
Peru and Venezuela have developed over the last decade. In the case of Central American
countries, there is a high comparative advantage in food and animals products. Manufacturing
does not exhibit high levels of comparative advantage computed in this way (see the low indexes
for all Central American countries).
Central America's China trade is certainly complicated by the diplomatic rivalry between China
and Taiwan. Only 22 countries now maintain diplomatic relations with Taiwan, and fully twelve
of those are countries in Latin America and the Caribbean. More to the point, all of these save
Paraguay are small to very small economies in Central America and the Caribbean.7 Of the six
countries covered in this chapter, only Costa Rica has established relations with Beijing, and
broken relations with Taipei, and only since June 2007 (a free trade agreement with China
followed in April 2010).
For decades, the smaller economies of the region may have judged their bet on Taiwan a good
7 Haro Navejas (2011), Aguilera Peralta (2010) and Rodríguez (2012) sketch the diplomatic history of
Taiwan's relationship with Central American countries.
Product code Argentina Brazil Chile Colombia Mexico Peru Venezuela Costa Rica Guatemala Nicaragua Panama El Salvador
Food and live animals 2.45 1.32 1.46 0.95 -0.68 7.56 -3.38 1.99 2.47 3.86 7.74 11.74
Beverages and tobacco 1.39 1.74 2.45 -0.68 0.54 -1.87 -1.65 -1.10 1.25 0.25 1.41 -0.70
Crude materials excluding food/ Fuels 1.04 1.87 3.25 0.38 0.79 2.26 -1.42 0.57 1.19 0.80 0.06 -1.42
Mineral fuels/lubricants 1 1.77 -2.08 -2.64 3.60 0.25 -0.13 4.29 -2.52 -0.60 -0.55 1.19 -0.78
Animal/vegetable oils/fats/waxes 3.41 0.78 -2.04 -1.00 -0.90 1.19 -2.01 1.41 -0.20 -1.46 -0.60 -0.31
Chemicals/products -0.68 -0.77 -0.62 -0.50 -0.89 -2.58 -2.41 -0.80 -0.05 -3.43 -1.26 -2.02
Manufactured goods 0.00 1.03 1.44 -0.20 -0.28 0.52 -0.91 -0.63 -0.14 -1.86 -0.84 -0.39
Machinery/transport equipment -0.78 0.24 -2.27 -1.74 0.87 -3.92 -3.92 0.82 -2.34 -4.55 -6.20 -3.25
Miscellaneous manufacturing -1.15 0.27 -1.69 0.12 0.88 0.74 -2.72 0.43 0.25 -0.69 0.20 0.71
Other commodities 0.96 8.69 1.52 -1.06 -3.33 2.20 -3.50 -1.44 0.35 -4.81 4.29
Product code Argentina Brazil Chile Colombia Mexico Peru Venezuela Costa Rica Guatemala Nicaragua Panama El Salvador
Food and live animals 8.00 3.36 9.11 11.09 3.56 4.74 -3.42 3.71 2.68 4.43 6.77 5.28
Beverages and tobacco 1.72 1.02 1.04 -2.02 0.55 -2.65 -2.83 -0.76 0.43 0.49 1.00 0.30
Crude materials excluding food/ Fuels 2.66 3.52 3.49 1.38 0.39 3.59 -0.08 0.57 1.59 0.07 0.53 -0.65
Mineral fuels/lubricants 1 0.14 0.70 -1.77 3.34 0.91 0.51 5.88 -2.22 0.17 -0.44 -1.05 -0.46
Animal/vegetable oils/fats/waxes 4.21 1.29 -0.78 1.48 -1.15 1.40 -3.60 2.23 2.23 1.79 3.35 0.15
Chemicals/products 1.43 -0.10 -0.16 -0.95 -0.65 -2.08 -3.13 0.61 -0.70 -3.39 0.16 -1.50
Manufactured goods -0.67 -0.21 2.00 -0.61 -0.31 0.14 -1.81 -0.34 -0.37 -2.25 -1.10 0.14
Machinery/transport equipment -0.92 -0.85 -2.78 -3.12 0.92 -4.17 -4.09 -0.43 -2.99 -4.11 -7.41 -2.45
Miscellaneous manufacturing -1.68 -0.98 -1.59 -0.56 0.30 -0.24 -3.93 1.27 1.67 -0.42 -1.97 3.24
Other commodities -0.32 -1.94 -1.86 -0.40 -1.30 1.44 -5.48 -3.32 -4.75 0.51 -0.76 -0.45
2010
2000
Avendaño & Dayton-Johnson - 16
one, as Taipei rewarded their diplomatic loyalty with development assistance (including foreign
aid and technical assistance) and other economic links: that is, they benefited from Taiwan's so-
called "checkbook diplomacy." But with the election of the Kuomintang administration to the
national government in 2008, checkbook diplomacy more or less came to an end. Overtures to
Beijing from countries in Taipei's camp have been reportedly rebuffed for now. The country
most frequently mentioned as next in line for normalization of relations with Beijing is Panama:
certainly Chinese firms are interested in improvements to Panama's canal, just as Panama
recognizes the looming importance of Chinese demand for much of the goods that transit through
the canal. But despite sporadic high-level contacts over several years -- including a Spring 2004
visit by the Chinese Vice-Minister for Foreign Affairs to China -- Panama and China have not
advanced to formal diplomatic relations.
In light of the economic analysis of the structure of Central America's foreign trade presented
here, it is difficult to see how normalized relations between Beijing and the Central American
republics would have fundamentally changed the stakes for Chinese-Central American trade.
Indeed, most Central American countries' trade with China, though small, nevertheless amply
exceeds their trade with Taiwan. Would formal relations, and perhaps free trade agreements, have
increased flows all that much? Given the poor complementarity between Central American
supply and Chinese demand, and the small scale of Central American markets for Chinese sellers,
it does not appear that diplomatic constraints were particularly binding on trade flows.
3. China and Central American Development Strategies
How should Central American trade policy makers respond to China’s consolidation as a global
driver of growth? Can trade with China be marshaled in support of productive transformation --
the capacity of an economy to engage in structural change and higher productivity activities? Few
Avendaño & Dayton-Johnson - 17
Latin American economies have achieved this. Productivity levels in the region have remained
stagnant for years, and they explain to great extent the low income of the region relative to
industrialized economies (Daude and Fernández-Arias 2010).
Recent research has explored the relationship between export structure and productive
transformation. The "product space" literature (Hausmann et al. 2007, Hidalgo et al. 2007,
Jankowska et al. 2012) has focused on the "aggregrate value" of exports as a way of categorizing
relationships between export industries, in order to evaluate the export profile of a specific
country over time. These researchers find that two dimensions in particular provide an
informative perspective the country’s positioning in world trade. The degree of sophistication of a
country’s export basket8 (EXPY in fig. 13) indicates the complexity of the goods the country
exports. The second, capability (Hidalgo and Haussmann, 2009), measures the variability of
goods produced by a country, taking into account how frequently these goods are produced in
other countries. In other words, the capability measure combines a measure of product
diversification (how many goods are exported) with a measure of uniqueness (how different is the
country’s export basket from the rest of the world). Both measures have been demonstrated to be
statistically accurate predictors of GDP growth in this empirical literature.
8 For details in the estimation of the indexes, see Hausmann et al. (2007), Jankowska et al. (2012). We can
include an annex explaning the different indexes, no?
Avendaño & Dayton-Johnson - 18
Figure 13. Export sophistication and capacity, various countries, 1965-2009
Note: Definitions of the variables provided in the text.
Source: Jankowska et al. 2012.
Figure 13 depicts the relationship between EXPY (sophistication of exports) and the capabilities
index (capacity to produce new products) for a number of selected economies between 1965 and
2009. The U.S. has particularly high values of both variables over many years; South Korea and
Singapore have high values of both in recent years, after substantial increases in both dimensions
over time.
The results for Central American countries are striking. Most countries of the region are
concentrated in low-sophistication goods. However, the trajectories differ from country to
country. In Costa Rica, and to some extent Guatemala, the level of sophistication of exports has
ARG65
ARG70
ARG75
ARG80ARG85
ARG90
ARG95
ARG00ARG05
ARG09
BRA65BRA70
BRA75
BRA80
BRA85
BRA90
BRA95
BRA00BRA05
BRA09CHL65
CHL70CHL75CHL80CHL85CHL90
CHL95
CHL00
CHL05
CHL09
COL65
COL70
COL75
COL80
COL85
COL90
COL95
COL00COL05
COL09
CRI65
CRI70
CRI75
CRI80
CRI85
CRI90
CRI95
CRI00
CRI05
CRI09
ESP65
ESP70ESP75ESP80
ESP85ESP90 ESP95
ESP00
ESP05ESP09
GTM65
GTM70
GTM75GTM80
GTM85
GTM90
GTM95
GTM00
GTM05
GTM09
KOR65
KOR70
KOR75
KOR80
KOR85
KOR90KOR95
KOR00
KOR05KOR09
MEX65MEX70
MEX75MEX80
MEX85
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MEX95
MEX00
MEX05MEX09
NIC65
NIC70
NIC75
NIC80
NIC85
NIC90
NIC95NIC00
NIC05
NIC09
PAN65
PAN70
PAN75
PAN80
PAN85PAN90
PAN95
PAN00
PAN05 PAN09
PER65PER70
PER75
PER80
PER85
PER90
PER95
PER00PER05
PER09
PRT65
PRT70
PRT75PRT80
PRT85
PRT90
PRT95
PRT00PRT05
PRT09
SGP65
SGP70
SGP75
SGP80
SGP85
SGP90
SGP95
SGP00SGP05
SGP09
TUR65
TUR70
TUR75
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TUR00
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USA65 USA70
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USA95USA00
USA05
USA09
-1.5
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-0.5
0
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-3000 2000 7000 12000 17000 22000
Cap
abil
itie
s
EXPY (value of exports)
LAC/OECD Central America
Avendaño & Dayton-Johnson - 19
increased between 1965 and 2009, with a concurrent fall in the capability index. Panama, on the
other hand, experienced an increase in the sophistication of exports up to 2000, which decreased
thereafter, together with its capability index (indeed, Panama in 1965 had higher values of both
dimensions than any other Central American country-year observation in fig. 13). In the case of
Nicaragua the increase in sophistication has not been accompanied by higher capabilities. The
picture emerging from the product space methodology is that Central American countries have
marginally increased the sophistication levels of their exports, but their capabilities remain low.
This suggests that their capacity for upgrading towards high value-added goods is still
constrained, even if the basket of goods they export is more diversified (fig. 6).
In the area of international trade, Central American countries face many of the same challenges
today that they did before China's rise in the early 1990s, many of them more acute today perhaps
than in the past: i) high levels of specialization and for some countries, increased competition; ii)
low value-added and sophistication in their exports, and iii) ever slimmer prospects for upgrading.
Policy makers have focused on horizontal policies, such as infrastructure and innovation, to
tackle some of the challenges posed by the China effect. Better infrastructure, in particular, could
contribute to the strengthening of Latin American countries' competitive trade position.
Investment in infrastructure in most countries remains low, which undermines competitiveness
(OECD 2007, 2012). The state of trade-related infrastructure is likely to be most important for
countries that compete with China in third markets. In this connection, the Latin American
business press regularly reports that it takes longer or costs more (or both) to ship a container
from some Latin American port to the U.S. than it does from China, because of poor quality
infrastructure. The Logistics Performance Index (LPI) provides a snapshot of weak and strong
points for countries in trade logistics, based on a survey of operators (global freight forwarders
and express carriers). Most Central American countries score poorly in terms of
Avendaño & Dayton-Johnson - 20
competitiveness/logistics, and lag behind East Asian economies like Vietnam, Thailand or
Malaysia (fig. 14).
Figure 14. Logistics Performance Index, 2012
Source: World Bank (2013)
0
0.5
1
1.5
2
2.5
3
3.5
4
Korea, Rep. Malaysia Thailand Philippines Vietnam Indonesia Guatemala Costa Rica Panama El Salvador Honduras
Logi
stic
s P
erf
orm
ance
Ind
ex
Avendaño & Dayton-Johnson - 21
4. Summary and Conclusions
In the current debate surrounding China's impact on Latin American development, Central
America seems doubly cursed: largely trapped in a trade structure of primary product export
dominance, with relatively low value added, like the booming South American commodity
exporters; but at the same time not profiting from vigorous Chinese demand for its exports --
unlike the South American countries -- and perhaps suffering from Chinese competition, like
Mexico. Our systematic assessment of Central America's trade, in the larger context of changing
Latin American patterns of trade, uncovers a truth that is somewhat more nuanced than that
pessimistic interpretation, but largely confirms that there is little in China's rise likely to benefit
Central American countries at present.
Among the nuances in the story is the heterogeneity of Central American countries. In fact, the
larger Latin American dichotomy of booming economies selling primary products to China on the
one hand, and struggling manufactures exporters competing with China on the other, is partially
reproduced in miniature among the countries of the isthmus. Only partially, though. There is a
group of primary product exporters: coffee, sugar and bananas all dominate the exports of
Guatemala, Honduras, Panama. Unlike the case of many of their South American counterparts,
however, these exports are not in demand in China the way that certain minerals or extensively
farmed crops are. Whether changing consumption patterns in the Chinese middle class, for
example, will drive up demand for these Central American commodity exports in the mediurm to
longer term remains to be seen.
There is also a group of mixed manufactures exporters: Costa Rica, El Salvador, Nicaragua. All
of these countries also export primary products but have substantial industrial exports as well.
Avendaño & Dayton-Johnson - 22
Compared with Mexico, however (the textbook case of a country that suffers from competition
with Chinese trade), the figures reported in this chapter suggest that competition with China is not
particularly acute (except for Guatemala and El Salvador).9
China's booming growth certainly presents opportunities for some Central American businesses
and some Central American investment projects, and there will be even more such opportunities
in the future. But in the aggregate, Central America has largely remained on the sidelines of the
explosion of Chinese-Latin American trade and investment, and it is quite likely to remain
relegated to the sidelines. Changes in cross-straits tensions between Taipei and Beijing could, if
anything, be bad news for Central American countries as Taipei's willingness to underwrite
development projects is likely to flag even as Beijing's is cool to diplomatic advances from
Central America.
There remains, perhaps, one sphere of economic influence, more diffuse and more difficult to
detect, that could have an impact on Central America' prospects. That is the increasing success of
the Chinese development model in the marketplace of ideas, even supplanting the long-standing
supremacy of the liberal "Washington Consensus" with (several competing versions of) a
"Beijing Consensus."10
More than a few policy makers and opinion leaders in Latin America have
been emboldened by China's success to promote new development strategies in their own
countries: these include a variety of measures, among them a more activist industrial policy and
more generous social transfers. If these debates encourage Central American policy makers to
consider productive and efficient alternatives to the low-value-added export-drive development
model, that would be a beneficial -- though quite indirect -- consequence of China's rise.
9 Competition with China may be more pronounced than the statistics suggest: it could be that commodity
prices, unusually high at present, obscure the degree of competition in other sectors such as textiles, in the
computation of the various indices considered in Section 2. 10
John Williamson, who coined the term "Washington Consensus," considers the new policy prescriptions
in a 2012 paper in Asia Policy.
Avendaño & Dayton-Johnson - 23
In the meantime, though, the critical tasks for Central American development strategies are not
fundamentally changed by the China factor. In terms of trade, lowering the cost of trade via
infrastructure investments could stimulate existing trade relationships. More generally, the
overarching economic policy priorities of all Latin American countries in the two-thousand-teens
are most certainly those of Central America as well: reducing economic inequality and its
associated disastrous consequences, and raising productivity.
Avendaño & Dayton-Johnson - 24
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Avendaño, Rolando, and Javier Santiso, (2011), "Asian Opportunities and Diversification
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