The PA is a relatively young trading bloc, with its clauses only coming into force in July 2015. While it has achieved some notable reductions in barriers to trade, such as the immediate elimination of 92% of tariffs, most of these measures had already been achieved through existing bilateral agreements between member countries. The real test for the PA will be whether it can build upon this base to further advance intra-bloc integration and successfully eliminate the remaining 8% of tariffs. Given the speed in which members have been able to reach consensus on a number of issues thus far, there are positive signs that the PA will do this. If, and when, the Alliance decides to admit additional members, however, it may find it more difficult to maintain the level of consensus needed for such expansive and expeditious reform.

By reducing barriers to intra-bloc trade and investment, and providing incentives for integration, such as through cumulative rules of origin, the Alliance will likely help foster the creation of regional value chains within the bloc. This will help members reap the benefits of economies of scale and become more competitive players in overseas markets.

A study by the Inter-American Development Bank has outlined the potential for the agreement to help members harness production complementarities.13 Based on trade patterns, the report suggests that Mexico will be able to position itself in the final stages of supply chains, Chile and Colombia in the middle and Peru in more upstream segments. It also identified numerous instances of comparative advantage in member country inputs for production purposes. For example, Chilean wood has a comparative advantage in the manufacturing of furniture in Mexico and Peru; Mexican denim fabric for clothes in Chile, Colombia and Peru; Colombia polymers of propylene for plastic containers in Mexico and Peru; and Peruvian zinc and lead for wires and batteries in Chile, Colombia and Mexico.

Similarly, increasing intra-bloc trade will help to diversify the export portfolios of some members. Countries such as Chile and Peru have in the past relied on mineral exports when trading with Asia, with 80% of Chile’s exports in the past ten years comprised of metals and ores.14 In contrast, minerals have constituted only a third of Chilean exports to Latin America, with manufactured goods representing 50% of exports.15 Greater volumes of regional trade will thus help these members to diversify risk and benefit from the production of more value-added goods.

Some have questioned the extent to which these ambitions can be achieved, however, on the basis that current levels of trade between member countries are low, and there are several barriers to trade which will not be immediately addressed through the agreement. Intra-bloc trade is low, with no member country ranking as another’s top five trading partner. Partly a reflection of this is the fact that inadequate infrastructure and natural barriers drastically increase the cost of trading with one another. As one commentator has pointed out, shipping a container from Bogota to Barranquilla (both ports in Colombia) is three times the cost of shipping it to Hong Kong.16

On the investment front, many commentators look expectantly to the role that MILA will play in improving intra-bloc investment and attracting greater inflows of foreign capital. With a market capitalization in excess of $1 trillion, MILA will provide greater liquidity within the bloc and more diverse financing and investment options. As outlined [link to Investment tab] previously, the existing equity markets of some member countries are dominated by particular sectors, such as mining in Peru and financials and energy in Colombia. MILA will go some way in remedying this homogeneity, and in the process help spread risk across the market for investors.

With low registered trading volumes thus far, some commentators believe that the range of benefits to be incurred through MILA will be limited by incongruous tax regimes and investor regulations. A key challenge for the Alliance will be to advance regulatory harmonization in these areas, to render participation in MILA more seamless.

More in this category: « Footnotes Trade & Investments »

Leave a comment

Make sure you enter all the required information, indicated by an asterisk (*). HTML code is not allowed.

Pacific Basin Economic Council

Unit 2803-06, 28/F, Harbour Centre, 25 Harbour Road Wanchai, Hong Kong
Tel +852 2815-6550  |  Fax +852 2545-0449  |  Email

© 2017 Pacific Basin Economic Council. All Rights Reserved. Designed By PCG-Asia