The Andean Countries, China and India: Challenges and Opportunities in the Asia Pacific Region

By Allan Wagner, Secretary General of the Andean Community VIII Annual Conference of the Andean Development Corporation on Trade and Development in the Americas Washington, DC., September 9, 2004

The Andean Community is working on a new strategic roadmap to address the primary challenges we have on our external and internal agendas. The external agenda includes trade liberalization, increasing investment flows, fostering greater participation in global trade, and effectively preserving and benefiting from our custody of global public goods. The internal agenda includes bridging the poverty, exclusion, and diminished opportunity gaps, strengthening our democracies, enhancing our national and regional competitiveness, and giving special attention to rural and SME development. Our regional integration process should act as a coordinating axis between these two agendas.

These strategic guidelines were adopted by the Council of Presidents in the meeting held last July in Quito. While reintroducing the concept of development in the integration agenda with a perspective of competitiveness and inclusion, the Presidents secured the legal cohesion and the autonomy of the Andean Community by providing that our common rules and regulations will prevail in the relations amongst the Andean countries over agreements signed with third countries. At the same time they mandated that a program for deepening our commercial integration should be put in place by May next year.

Since January 2004, the trade negotiations front of the Andean countries has grown and is unlike any other we have faced in history, extending our capabilities to their limit. We are currently participating in five negotiations scenarios —WTO, FTAA and FTA negotiations with the United States, initial negotiations towards establishing an FTA with the European Union, FTA’s with Mercosur and other countries of the region, and our own internal negotiations within the Andean Community in order to deepen our integration process. Yet we are keenly aware that our next agenda is for our insertion into the Asia Pacific region, with special focus on China and India, so as to achieve effective participation in the world economy of the 21st century. We must make all possible efforts to develop and implement a strategy to assure benefits from the growth of this region.

Peru, the only Andean country now member of APEC, is making headway in that direction by negotiating an FTA with Thailand as a platform towards the ASEAN countries.

The General Secretariat of the Andean Community has put into force, with the help of CAF and the IDB, a special program for assisting the Andean countries in that demanding agenda of international trade negotiations.

China

In a recent editorial, The Economist states that “Since Deng Xiaoping launched his “open door” policy in 1978, China has witnessed the most dramatic burst of wealth creation in human history.”

According to the World Bank, China has become the country with the highest economic growth rate in the past decade, overcoming the world average by 400%. While the world economy between 1990 and 2002 grew at an average annual rate of 2.5%, China grew at an average annual rate of 9.3%. Even with the measures taken to decelerate its economy, China is forecasted to grow 8% this year.

The gradual process China began in 1978 of trade liberalization and modernization, has placed it as one of the key players in world trade. Today they are the fourth largest player, only behind the European Union, the United States and Japan, with exports in 2003 growing at a rate of 35% and imports at 40% rate.

This past year China made up over 10% of US imports, with the greatest growth in manufactured goods which made up over 90% of its total exports, of which 20.4% are of high tech products. The United Status, as the worlds greatest single market, has a trade deficit with China of US$ 509 billion.

As for imports, China is already one of the tour largest buyers, together with the United States, Germany and Japan. The effect of their coming into the world market has generated an increase in the price of primary goods such as petroleum, iron, soy beans, and copper amongst other, benefiting those developing nations that export these commodities.

Andean trade with China has grown from US$ 283 million in 1993 to US$ 2.348 billion in 2002, as has our trade deficit going from a US$ 13 million dollar surplus in 1993 to a deficit of US$ 841 million in 2002. Chinese exports to the region are made up primarily of electronics, toys, shoes, plastic goods, and other diversified light manufactured goods, while Andean exports are fishmeal and ores, with fishmeal and copper concentrates making up 60% of total exports, thus showing little diversification.

China is strong competition for Andean textile and garment manufacturers. It was the world’s largest exporter in 1995 and 2002, and its participation in the world market grew from 22.5% to 30% in the garment sector and 16% to 22% in the textile sector. With the full integration in the textile and garment sector in accordance with WTO norms, forecasts indicate that China and India will be the dominant players in world textile trade having over 50% growth that will be reflected primarily in the United States, Europe and Canada.

Andean Trade with India

India has recently received very much credit for their success in making Bangalore the services outsourcing capital of the world, as well as for the attention created by the BRIC report published in October 2003 by Goldman Sachs. This report indicated that by 2050 the economies of Brazil, Russia, India and China can together be larger that the group of six (the United States, Japan, Germany, France, Italy and the United Kingdom.) The report indicates that much of this growth will be in India and China, with India exhibiting stronger long term growth potential than China. India’s growth will be based on productivity gains, demographic transition, and exchange rate appreciation. Comparing Chinese and Indian reforms, the report indicates that China possesses a 10-15 year head start, and that China’s growth, driven by manufacturing contrasts with India’s service-sector growth.

India is an outstanding example of software production and services outsourcing in a world context. In 1995 they exported US $70 million in outsourcing services, and in 1999 the approached US $2 billion. India has highly qualified human resources accompanied by an excellent operations platform that allows it to accompany world industry. Their outsourcing industry is world class, and becoming an important supplier of American services. This sector now has 1,500 establishments for professional training, including software engineering schools, polytechnic and technical institutions. An estimate indicates that every year 50,000 software development professionals enter the market.

In spite of India’s advances in the virtual economy, Andean trade with India is primarily in goods. Our trade with India has grown from US$ 68 million in 1993 to US$ 591 million in 2002, and our trade balance generated a surplus for the Andean countries of US$ 6.9 million in 1992 and US$ 176 million in 2002. Exports to India are primarily petroleum, ores, and fishmeal, while our imports are manufactured and medical products. Indian software companies are also competing in the region.

General Implications of China and India coming online

According to the “Latin American and the Caribbean in the World Economy, 2002-2003” report published by ECLAC, “The net static effect on the region will be produced by the combination of increased exports to China -which, in turn, will result from improved conditions of access to its market and from its economic growth- and the potentially threatening impacts associated with keener competition from Chinese products in both domestic and third markets.

Specifically, the competitiveness of Chinese products, as revealed by the profile of imports of these products to Latin America and the Caribbean, will result in the displacement of locally produced textiles, clothing and footwear, as well as plastics and rubber manufactures.”

It is also widely anticipated that the end of the import quotas will lead to a sharp rise in U.S. imports from China and other Asian countries, resulting in lower market share and prices for Andean producers.

Conclusions

1. While China is an important potential market for many Andean exports, especially minerals, ores, petroleum, and agricultural commodities, it is also a strong competitor for our manufactured goods, especially for textiles and garments, both in our domestic market and in our principal export markets.

2. Unless the Andean countries effectively implement policies to enhance their competitiveness, they will be displaced from their markets for manufactured goods, and see a tendency to further commoditize their exports, with decreasing terms of exchange.

3. On the other hand, the accession of China to the WTO constitutes and important element to take into account in the future relations of the Andean countries with China. They must therefore find areas of strategic complementation and cooperation that will allow them to take advantage of this great market.

4. An understanding should be worked out between the Andean Community and China and India in order to provide access to their respective markets while securing orderly trade conditions for sensitive products.

5. The Andean countries should develop their vast energy, water and biogenetic resources to foster their economic development and strengthen their strategic position in international negotiations.

6. South American integration through free trade, the development of regional infrastructure and close association between the Andean Community, MERCOSUR and Chile will provide additional strength to the Andean countries in their projection to the Asia Pacific region.

7. In summary, with the enormous growth of China and India, and the impact they will have on Andean countries, it is necessary to promote policies to improve our competitiveness, to seek enhance our strategic positioning leveraging our strengths through Andean and South American integration, to complete FTA’s with the United States and the European Union, and to actively seek to become part the Asia Pacific community, with a clear objective of being incorporated as members of APEC in 2008, when is annual Summit meeting will take place in Peru and the current moratorium for new members will expire.