Navigating the Global Value Chains for LAC Countries

Discover the challenges faced by Latin American and Caribbean countries in participating in global value chains and the solutions being explored to overcome them. Join the quest for a more integrated production puzzle.

Navigating the Global Value Chains for LAC Countries
How LAC Nations Can Make Their Way Through the Global Value Chains. Image by DALL·E

Goods that used to be produced entirely in one country are now often produced in different parts of the world. This international fragmentation of production allows countries to specialize in one or a few aspects of production, reducing costs and benefiting developing countries. Participation in global value chains also brings opportunities for learning, technology transfer, and knowledge diffusion.

However, the rise of global value chains is uneven and primarily concentrated in Asia-Pacific, Europe, and North America, with Latin American and Caribbean (LAC) countries appearing to be on the sidelines. This article looks at how LAC countries fit into global value chains and what keeps them from being more integrated.

Participation in Global Value Chains

Being a part of global value chains can bring benefits like faster learning, technology transfer, and the spread of knowledge. However, it can be challenging to measure a country's participation in these chains due to limited trade data. Mexico stands out in the region in terms of participation in international production chains.

Mexico's proximity to the US makes it a prime location for offshoring activities, while other South American countries participate in earlier stages of production due to their abundant natural resources. Proximity and natural resources play a role in determining a country's level and type of participation in global value chains. However, there are other factors that public policies can affect that also have an impact on a country's involvement.

Transportation Costs

Expensive transportation discourages the movement of production between countries. Buyers prefer countries with good logistics infrastructure as it reduces transportation costs and delays in receiving inputs for their production.

Level of integration between countries

Integration between countries is crucial for the development of global production chains. Integrated countries participate more in production sharing due to reduced border restrictions and customs duties. International value chains involve trade, investment, and technology flows, which require close collaboration between countries.

The fragmentation of production through subsidiaries and the transfer of production to local suppliers depend on investment rules and intellectual property rights. Harmonized customs and security procedures between nations aid in the efficient border clearance of goods.

Deep integration agreements improve various aspects and lead to the growth of regional value chains. These agreements do more than just lower tariffs. They also deal with important things like investment policies, intellectual property rights, and making sure that customs procedures are the same everywhere.

Integration agreements between regional countries go beyond reducing tariffs, but companies face challenges in complying with all rules and regulations. The different agreements have varying rules of origin, which limit the use of inputs from outside each bloc. These rules of origin determine if a product qualifies for preferential access but also limit companies from using inputs from other countries.

Solving the Barriers to International Production Chains

To solve this issue, there are efforts to link existing agreements and achieve convergence through the accumulation of rules of origin and harmonization of standards. One trend in this direction is the way that Central American countries and Mexico are getting closer to each other in the middle.

The Pacific Alliance, consisting of Chile, Colombia, Mexico, and Peru, used to have bilateral agreements without the ability to cumulate origins in more than two countries. Now, the countries have a single rule of origin and can combine their strengths to make the most of their differences.

Examples of efforts to link integration agreements are positive steps. A continent-wide cumulation of origin would allow companies in Latin America and other regions to fully utilize differences in cost and resources, encouraging them to collaborate in production processes with firms in other countries.

The growth of international production chains is mainly concentrated in Asia, Europe, and North America, and LAC countries participate less. The barriers to LAC's greater involvement include poor transportation infrastructure and services, and the lack of common standards and regulations important for value chains. Improving transportation and logistics and harmonizing trade agreements would significantly impact production linkages within the region and globally.

Source: Antoni Estevadeordal and Juan S. Blyde, Comercio Exterior 7, Cadenas globales de valor, pp.12-18.