Openness to Trade, Internet access, and Volkswagen
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The insightful but sometimes deceiving metric of trade openness
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Volkswagen’s new era in Latin America
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If you read our stories each week, you know how important trade is for Latin American countries. From Chilean copper to Venezuelan oil, much of the region’s growth in recent decades can be attributed to its goods and resources being in high demand the world over.
But how has that importance evolved over, say, the last 60 years? Trade openness is the percentage of GDP made up by a country’s total two-way trade (both imports and exports). Since 1960, countries like Nicaragua and Uruguay have seen their trade openness soar on the back of growing international trade, while others have seen a slight diminishing. But it’s crucial to understand that a drop in openness is not necessarily a bad thing—both Panama and the Dominican Republic, for example, have diversified their economies in a promising way.
Tracking growth in trade openness may also be deceiving, as Panama’s most recent trade openness was 84%, higher than every major Latin American economy. However, that percentage peaked in 1974 at nearly twice its GDP, explaining the relative drop in importance in the years since. Panama has long been the story of a small domestic market and significant international trade passing through its namesake canal. Today, it’s a case of successful diversification into other industries, something other small Central American countries like Honduras or Nicaragua cannot do as easily owing to limited natural resources.
In the case of Mexico, meanwhile, trade openness since 1960 has grown by over 300% as the country has become a major emerging market and Latin America’s main portal to the rest of the world. It has joined or signed free trade agreements with 50 countries, including major global economies like the US, Japan, and the European Union. In fact, from 1993 to 2019 alone, Mexican trade openness grew by 182%, something unheard of for much of the world. In a region where nearly every country saw a rise in trade openness in recent decades due to increased trade liberalization and the rise of China, Mexico is definitely the heavyweight champion of opening up commercially.
However, as countries like Argentina — which itself saw a near-doubling of its trade openness — can attest, increased dependence on trade is not always a good thing. Domestic industry can suffer from foreign competition, as seen in Brazil. Not to mention, being more plugged into the global economy means access to more markets, but it also means being more vulnerable to price shocks and international crises.
After all, our chart ends in 2019. A few months later, COVID-19 shut down the world. And not every country felt that shutdown equally.
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