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  Félix Peña

INTERNATIONAL TRADE RELATIONS NEWSLETTER
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TRANSNATIONAL PRODUCTIVE NETWORKS:
Some conditions that can contribute to their development and sustainability

by Félix Peña
June 2015

English translation: Isabel Romero Carranza


 

For any given country opportunities involve challenges of all kinds. On the one hand, is knowing how to detect these opportunities early on, which implies fine-tuning diagnostic capabilities. On the other hand, is harnessing them to benefit the national interests and the interests of the society as a whole. This requires an effort of organization and coordination of all the sectors involved.

One of the palpable effects of the changes that are taking place in the global economic scenario is that countries are expanding the geographic horizon of their international integration strategies. This is generating a picture of global economic competition and redistribution of power among nations that will require multi-regional strategies aimed at strengthening the relations with all the countries of the world.

Some of the main unresolved issues in terms of cooperation for regional economic governance in Latin America will require attention in light of recent developments, such as the growing economic role of China, the redefinition of the relations between the US and Cuba, and the acknowledgement by Mercosur and the Pacific Alliance of the convenience of a strategy for convergence in diversity.

We can mention at least three unresolved matters in terms of regional economic governance. The first is the adaptation of institutions and joint work methods to the new global and regional realities. The second is to define strategies for preferential negotiations with other regions. The third, and perhaps the most important, is to create conditions that render viable multiple forms of transnational networks that link the development of competitive goods and services at global scale.

The experience gained in the region provides some conclusions about the conditions that, if developed in the coming years, could facilitate the expansion of the system of productive networks at Latin American scale. The main ones are: the quality and density of the connectivity between national economic spaces, especially in South America; the quality of the ground rules to ensure access to the corresponding markets and the stability of the conditions for productive investment, and the quality of national strategies aimed at promoting greater connection, compatibility and convergence between the productive systems of the countries in the region, as well as encouraging the transnational association between companies.


A timely detection of the windows of opportunity that are opening up is relevant for the integration of a country into world trade. This has always been the case, but it is much more so now in an international context with a strong dynamic of change. (For related developments refer to, among others, the March 2015 issue of this Newsletter, on http://www.felixpena.com.ar, and the August 2014 issue on http://www.felixpena.com.ar/).

The weight of the immediate problems that Latin American countries often have to confront (among others, weakening economic growth, social inequality and poverty; organized crime, violence and corruption; citizen dissatisfaction and problems of social legitimacy; stagnation of social mobility and loss of future horizons), often make it difficult to detect any opportunities that arise. As a result, the short term usually prevails.

This is even more true in a society that, for many different reasons, is dominated by a culture of attachment to the past. In all spheres of life the past is often recognized and valued. But to be stuck in the past may make it difficult to detect, in a timely manner, any opportunities that may arise for the future. Nostalgia weakens the ability to visualize new horizons. It is, for example, a current challenge for countries that have played a leading role in the international system for the last six decades and today perceive deterioration in their relative power and their ability to generate sustainable conditions for the welfare of their populations.

In this regard, and as pointed out a few years ago by the Venezuelan economist Carlota Perez, at a conference in Buenos Aires, perceiving in time the factors that affect the shifts of competitive advantages between nations requires mastering the skills of "hunters of moving targets". These are shifts that arise, for example, from geopolitical, technological and cultural changes, or from the distribution of relative power between competitors or even between nations. Eventually, they may render obsolete strategies and policies aimed at sustainable economic growth and development. This was experienced at one time by Latin American countries that attempted to preserve some of their industrial strategies, particularly those based on import substitution, which did not involve a simultaneous effort for innovation and for the development of technical progress. Something along the lines of what Fernando Fanjnzylber called "showcase modernization".

For a country -as for individuals, institutions, companies, athletes, artists-opportunities involve challenges of all kinds. One of them is knowing how to detect these opportunities early on. The other is knowing how to take full advantage of them to benefit national interests and, in particular, the interests of society as a whole. The first challenge involves refining diagnostic capabilities. The second entails a strong effort for the organization and coordination of all the sectors involved at the public, business, social and academic level. (In this regard see the January 2015 issue of this Newsletter on http://www.felixpena.com.ar/).

The above considerations become relevant when considering the scenario of global economic competition that Latin American countries are likely to confront in the coming years. The combination of opportunities and challenges will be present in at least three aspects. The first of these aspects is the increase in world population, especially in Asia, Africa and Latin America itself and, in particular, the growth of urban middle class sectors. The second is the constant technological change, with its impact on the production of goods, provision of services and, in particular, the global connectivity of countries, markets, competitors, consumers, workers and citizens. And the third is the impact of the two abovementioned changes in political and economic governance, both globally and in the different regions. All this will have a strong impact on values, beliefs, identities, cultural preferences and even in the relative power of nations and regions.

One of the practical effects of the changes that are taking place and that will continue to occur in the three aspects mentioned above, is the expansion of the geographic horizon of the international trade integration strategies of each of the countries of the region and, therefore, of the region as a whole. In this sense, the scenario of global economic competition and redistribution of power among nations which is emerging will require the development of multi-regional strategies aimed at intensifying economic relations with all countries and regions worldwide. (In this regard see the January 2013 issue of this Newsletter on http://www.felixpena.com.ar/).

Obviously, the multiplicity of options that this will entail will depend on the products and services that a country is sable to offer to the rest of the world. An example of the tous azimuts scope of an international trade integration strategy aimed, simultaneously, at multiple targets is food production -especially for the supermarket aisles- and the provision of services related to its production, including innovation and distribution. It is one of the assets that generate opportunities in South American countries, as is reflected, among others, by the activities of the GPS Group -group of producing countries of the South, also known as ABPU (see http://grupogpps.org/en/). In the case of Latin American countries, examples of this may be found at multiple levels linked with energy, industrial production and construction, creativity, natural resources and transportation, among others.

The recent visit of the Prime Minister of the People's Republic of China, Li Keqiang, illustrates the opportunities and challenges that have opened up in recent years for Latin American countries. They can be considered opportunities due to the size of the Chinese economy and the willingness expressed by the Chinese government to stimulate a quantitative, as well as qualitative, leap in the future development of trade and bi-regional investments. Concepts such as that of diversification of the economic structure and of cooperation in production capacity have marked the contents of the agenda that Latin American countries will have to fulfill in the coming years in their joint work with China, including the projection to Asia-Pacific and Eurasia. It is an agenda that is not opposed and even complements that which should be developed with other regions in which China also has a growing presence, such as North America, Europe, the Arab countries and Africa.

Among the major announcements that have been made by the authorities of the Chinese government on its relations with Latin America we should mention, due to its scale, the creation of a Special Fund for Cooperation in Matters of Productive Capacity between China and Latin America and the Caribbean. The Fund will provide thirty billion dollars in funding to support cooperation projects in the fields of production capacity and the manufacture of equipment. (In reference to this, see the presentation by Li Keqiang at the China-Brazil Business Summit, on May 20, 2015, on http://www.fmprec.gov.cn/. See also the speeches by the Executive Secretary of ECLAC, Alicia Bárcena and Prime Minister Li Keqiang during his visit to ECLAC, in Santiago de Chile, on May 25, 2015, on http://www.cepal.org/es/print/31563 and on http://www.fmprc.gov.cn/esp/zxxx/t1267618.shtml).

Some of the main outstanding matters in relation with cooperation for regional economic governance among Latin American nations require strong attention if we consider recent events, such as those that point to the growing economic role of China, the redefinition of the relations between the US and Cuba, and the recognition by the Mercosur and Pacific Alliance countries of the convenience of developing a strategy for convergence in diversity. (On this last point, see the December 2014 issue of this Newsletter on http://www.felixpena.com.ar).

There seem to be three unresolved matters that can be mentioned in relation with regional economic governance. The first of them is the adaptation of institutions and methods of joint work to the new economic and political realities that have been evinced in the region and at the global level. This is something that has gained strong relevance in recent times in relation to what can be called the "aggiornamiento of Mercosur" -i.e.: its updating in terms of its objectives and methodologies. The same would apply to other institutions of regional cooperation that reflect outdated realities, meaning that they were conceived and designed in a world that, in fact, no longer exists.

The second is to define the strategies for preferential trade negotiations with other regions in light of what finally results from the evolution of the negotiations of the interregional mega-agreements, such as the Transpacific Partnership (TPP) and the Trade and Investment Partnership (TTIP).

The third, and perhaps the most important, is to create conditions that would make possible the development of multiple forms of transnational networks that help link, at regional level and with projection to the world, the capacity that the countries may develop to produce goods and provide services that are competitive on a global scale.

What does the experience gained in the region regarding the development of transnational productive linkages teach? As we know, this is a relatively poor experience given that transnational production chains, in their various forms, have not developed in Latin America in a way that is comparable to that of other regions, such as Southeast Asia, North America and Europe

The experience gained in the region, however, would help draw some preliminary conclusions on what conditions would need to be developed in the coming years in order to encourage the widening of the network of transnational productive chains in Latin America.

The three main conditions to be developed would be the following:

  • Quality and density of the connectivity between the different national economic regions, especially in South America, in terms of physical infrastructure and transport and in the facilitation of trade. Much would need to be done in the region in order to make it really attractive for productive linkages aimed at producing goods and providing services for the region and the world. This is one of the areas in which joint action with China and other emerging countries has the best prospects for the future. A strategy of preferential trade agreements in their various forms and not necessarily in accordance with pre-established models, making use of the flexibility allowed by WTO rules -if well interpreted-, with large countries and regions such as the USA and Canada, the EU, China and India, could also be more attractive.

  • Quality of the ground rules to ensure access to the respective markets and conditions in which to develop productive investments. The precariousness of the ground rules, especially those relating to the conditions of access to markets, as has been the case in LAFTA first and the ALADI and Mercosur later, has been one of the major factors affecting the development of sustainable production chains in the region. The expression "I was not given the market I was promised", common among SME entrepreneurs in less developed countries, illustrates the scope of the effect of the precariousness of rules. Given the importance of certainty and ease of access and exit of the markets and even the possibility of accumulating rules of origin, this a central factor when promoting the development of regional production networks.

  • Quality of national and business strategies aimed at promoting greater connection, compatibility and convergence between the productive systems of the countries in the region as well as transnational business partnerships. This is a key factor in a world with multiple options that requires the insertion of companies in transnational production, distribution and service provision networks. It is difficult to imagine successful companies that do not have a strategy based on knowing with certainty what they want and what can be obtained by partnering with companies in other countries, making use of the multiple forms of joint production and value chains.

A discussion of the conditions mentioned above and others that may be required seems fundamental in articulating national and regional strategies to seize the opportunities that are opening up in the world for the countries of the region. This debate should be focused on how to create conditions to encourage and provide stability for the multiple forms of productive linkages that may develop in the region.

Without prejudice to other instruments that can be employed, the institutional framework of the LAIA provides some that may be functional to create conditions to encourage different forms of transnational production linkages. One of them is stated in Resolution ALALC/CMC No. 2 of 1980, which establishes the system of partial scope agreements, especially through Articles 7 and 10. Their provisions would even allow to imagine creative mechanisms to provide greater certainty for those who invest in the development of such production chains, as well as for those involved in their financing.

The LAIA becomes thus one of the appropriate ambits to encourage the establishment of conditions that help develop production linkages between companies of the region. (In this regard, see the different resolutions adopted since its creation in 1980, such as, for example, resolutions 50 (X) from 1998; 55 (XII) from 2002; 59 (XIII) from 2004, 62 (XIV) from 2008, 73 (XV) from 2009, and 79 (XVII) from 2014, on http://www.aladi.org/). It should be noted that preferential tariff commitments within the scope of the LAIA can be compatible with WTO rules thanks to its Enabling Clause.

It is, moreover, an ambit through which to move forward in other aspects that are important for a regional strategy aimed at developing transnational productive linkages, such as those related with the accumulation of rules of origin and trade facilitation.



Recommended Reading:


  • Bremmer, Ian, "Superpower. Three Choices for America's Role in the World", Portfolio (Penguin Book), New York 2015.
  • Breznitz, Dan; Murphree, Michael, "Run of the Queen. Government, Innovation, Globalization and Economic Growth in China", Yale University Press, New Haven - London 2011.
  • Breznitz, Dan; Zysman, John (eds.), "The Third Globalization. Can Wealthy Nations Stay Rich in the Twenty-First Century?", Oxford University Press, Oxford - New York 2013.
  • Carmody, Patricio Mateo, "Buscando Consensos al Fin del Mundo. Hacia una política exterior argentina con consensos (2015-2027), KAS - CARI, Buenos Aires 2015.
  • ECLAC, "Latin America and the Caribbean and China. Towards a new era in economic cooperation", ECLAC, Santiago de Chile, May 2015, en: http://repositorio.cepal.org/.
  • Fundación EU-LAC y CEPAL, "Espacios de diálogo y cooperación productiva: el rol de las pymes", Perspectivas Económicas Interregionales, Fundación EU-LAC y CEPAL, Hamburgo 2015, en: http://eulacfoundation.org/.
  • Giacalone, Rita, "Latin American Answers to Mega-Regional Projects: Options and Limits", Roy, Joaquin (ed.), "A New Atlantic Community. The European Union, the US and Latin America", Miami-Florida European Union Center - Jean Monnet Chair and CARI, Miami FL. 2015, ps. 175 a 187.
  • Kershaw, Ian, "The End. Germany 1944-45", Penguin Books, London - New York, 2012.
  • Malamud, Carlos, "Regional Integration in Latin America: A Diagnosis of the Crisis", en Roy, Joaquin (ed.), "A New Atlantic Community. The European Union, the US and Latin America", Miami-Florida European Union Center - Jean Monnet Chair and CARI, Miami FL. 2015, ps. 199 a 207.
  • Mantilla Baca, Sebastián (ed.), "La Expansión de China en América Latina", CELAEP - Fundación Hanns Seidel, Quito 2015, en: http://www.hss.de/fileadmin/.
  • OECD, "Perspectives économiques en Afrique 2014. Les chaïnes de valeur mondiales et l'industrialization de l'Afrique ", OECD-Centre de Développement - Groupe de la Banque Africaine de Développement - PNUD, Paris 2014, en : http://www.ired.org/.
  • Peña, Félix, "Regional integration in Latin America : the strategy of convergence in diversity and the relations between Mercosur and the Pacific Alliance", en Roy, Joaquin (ed.), "A New Atlantic Community. The European Union, the US and Latin America", Miami-Florida European Union Center - Jean Monnet Chair and CARI, Miami FL. 2015, ps. 189 a 198.
  • Pettis, Michael, "Avoiding the Fall. China's Economic Restructuring", Carnegie Endowment for International Peace, Washington DC. 2013
  • Rabuffetti, Mauricio, "José Mujica. La Revolución Tranquila", Aguilar, Buenos Aires 2015.
  • Rein, Shaun, "The End of Cheap China. Economic and Cultural Trends that will Disrupt the World", John Willey & Sons, Inc., Hoboken NJ. 2012
  • Rein, Shaun, "The End of Copycat China. The Rise of Creativity, Innovation, and Individualism in Asia", John Willey & Sons, Inc., Hoboken NJ. 2014.
  • Roy, Joaquin (ed.), "A New Atlantic Community. The European Union, the US and Latin America", Miami-Florida European Union Center - Jean Monnet Chair and CARI, Miami FL. 2015.
  • Vayssiere, Pierre, "Simón Bolívar. El Sueño Americano", Editorial El Ateneo, Buenos Aires 2008.

Félix Peña Director of the Institute of International Trade at the ICBC Foundation. Director of the Masters Degree in International Trade Relations at Tres de Febrero National University (UNTREF). Member of the Executive Committee of the Argentine Council for International Relations (CARI). Member of the Evian Group Brains Trust. More information.

http://www.felixpena.com.ar | info@felixpena.com.ar


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