SOUTH AMERICAN REGIONAL TRADE: ECONOMIC, GEOGRAPHIC, AND POLICY CONSTRAINTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97R00694R000600250001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 29
• Document Creation Date: December 22, 2016
• Document Release Date: March 28, 2011
• Sequence Number: 1
• Publication Date: July 1, 1986
• Content Type: REPORT

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A~' U'SJ Intelligence
South American Regional Trade:
Economic, Geographic, and
Policy Constraints
GI 86-10048
July 1986
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South American Regional Trade:
Economic, Geographic, and
Policy Constraints
This paper was prepared
with a contribution from
by
Department of Commerce.
Comments and queries are welcome and may be
directed to the Chief, Economic Division, OGI, on
Secret
GI 86-10048
July 1986
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Summary
Information available
as of 3 June 1986
was used in this report.
Policy Constraints
Economic, Geographic, and
South American Regional Trade:
regional political cohesion by constraining economic linkages.
Economic progress in South America has been adversely affected by the
decline in regional trade in the 1980s. Since the advent of the debt crisis,
South American regional trade has decreased by more than one-fourth,
despite the relatively successful efforts to expand exports to markets
outside the continent. Regional exports now account for only 10 percent of
total exports from South American countries. We believe the lack of
regional trade has created economic inefficiencies and has retarded
developed for trade with non-South American markets.
Although the decline in regional trade ended in 1983, a resurgence is
unlikely in the near term because:
? Debt-related trade strategies target exports to developed-country mar-
kets and restrict imports, including those from other South American
countries.
? Protection of emerging domestic industries-for example, computers,
pharmaceuticals, and automobiles-limits imports of these items from
neighbors.
? Commodity-based trade probably will continue to experience low and/or
falling prices; fuel exports are the most recent example.
? Regional trade organizations are weak and relatively ineffective.
? Geographic barriers-the high Andes and the Amazon Basin, for
example-and poor infrastructure pose difficulties for developing an
adequate highway and rail network. In addition, ports and airports were
realizing the benefit of reduced trade barriers for economic growth.
Although there are considerable constraints, South American leaders are
showing more interest in reviving regional trade and becoming less
dependent on developed-country markets. This move toward self-reliance
in trade is being influenced by the growing threat of protectionism from
Western countries and demands by international financial institutions to
implement economic structural reform as prerequisites for additional
lending. In addition, South America's economic decision makers are
In the short term, US exports to South America could be hurt by regional
trade cooperation, for example, market sharing in pharmaceuticals and
chemicals. In the long run, however, we believe expanded regional trade
would be beneficial for US interests. In particular, opportunities for US
exports to the region should improve if South America's efforts to increase
Secret
GI 86-10048
July 1986
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regional trade are successful in stimulating economic growth and develop-
ment. Some of the pressure on access to US markets could be reduced if re-
gional markets were expanded for South American goods. Moreover,
increased regional trade would improve chances for economic growth and
stability in the recently elected governments of South America, such as
Argentina, Brazil, and Uruguay. Increased integration, however, would
increase the risk, although small, that instability in one area could spill
over to other countries in the region, as was the case in Central America.
To expand regional trade, South America has to develop further products
suited for the continent's markets. Some sectors for potential expansion
might include processing of raw materials, for example, food and agricul-
tural materials, and exporting semifinished goods, like metals, for further
processing in neighboring countries. In our view, however, the outlook for
expanded regional trade is unfavorable for goods that are protected by
import substitution programs aimed at industrial development, such as
electronics and automobiles. We believe chances are slim that South
American countries will substantially open their domestic markets to
regional imports in the near term, given the concern for protecting
domestic economic sectors and the continued need to restrict imports to
conserve foreign exchange. Moreover, concern over who receives the most
benefit from expanded regional trade could hamper enthusiasm for and
progress in the drive to increase trade in South America.
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JCUFUL
Argentina and Venezuela: Also Major Exporters 2
The Key Constraints: Economics, Trade Policy, and Geography 6
Geography 9
Direction of South American Regional Trade 17
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South American Regional Trade:
Economic, Geographic, and
Policy Constraints
Trade Patterns
During the mid-to-late 1970s, South American re-
gional trade enjoyed significant growth-almost tri-
pling to $9.5 billion between 1975 and 1980.' This
growth in regional trade far surpassed the growth of
South American trade with the rest of the world,
which only slightly more than doubled.
With the onset of the debt crisis, however, regional
trade contracted to $6.2 billion in 1983. The decline
in regional trade mirrored the overall decline in South
American imports as austerity programs forced down
imports of South American nations from their neigh-
bors as well as the rest of the world. In contrast,
exports to the rest of the world continued to expand,
growing by almost 8 percent between 1980 and 1984.
Since 1983 the decline in regional trade has been
arrested and the decline in South America's econo-
mies has been slowed. Regional exports grew slightly
in 1984 to $6.8 billion and, according to our esti-
mates, to perhaps $7 billion last year.
Trade shares are not evenly spread throughout the
region. In 1984 the major exporters-Brazil, Venezu-
ela, and Argentina-accounted for almost three-quar-
ters of total exports within South America, while the
medium-size exporters-Chile, Colombia, Peru, and
Uruguay-provided about one-fifth of the total. The
smallest exporters-Bolivia, Ecuador, and Para-
guay-contributed less than 10 percent to regional
exports for the same year.
Brazil: South America's Trading Hub. With a diver-
sified manufacturing sector to complement its existing
natural resource base, Brazil has become by far the
largest player in South American trade. Regional
' For the purpose of this research, South America includes Argenti-
na, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru,
Uruguay, and Venezuela. In addition, this research paper does not
address narcotics trade.
Figure 1
South America: Trade Patterns,
1975, 1980, and 1984
Regional
South America
exports nonetheless accounted for only 9 percent of
Brazil's total exports in 1984, down from almost 15
percent in 1980. Although Argentina is Brazil's main
regional trading partner, Brazil also has significant
trade relations with many of its neighbors in the
region.
Brazil's exports to South America are concentrated in
manufactured goods, accounting for almost two-thirds
of total regional exports in 1983. Moreover, Brazil's
manufactures' exports cover a variety of goods, in-
cluding metals manufactures to all of its South Amer-
ican neighbors except Peru and Colombia; automo-
biles to Chile, Colombia, Peru, and Venezuela; and
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South American Trade Patterns, 1984
machinery to Argentina, Colombia, Ecuador, Para-
guay, Uruguay, and Peru. Brazil also exports food
and agricultural products, including coffee, fruits and
vegetables, vegetable oil, and sugar to Argentina,
Chile, and Venezuela. Brazilian imports from its
neighbors are primarily commodities, including food
and agricultural products from Argentina, Paraguay,
and Uruguay; metals from Chile and Peru; and fuel
from Ecuador and Venezuela.
Brazil's success in 1983 and 1984 in achieving a trade
surplus with its South American neighbors, excluding
Venezuela, has led to trade tensions in the region. In
response to their trade deficits, Brazil's neighbors
have been calling for balanced trade with Brazil.
Although Brasilia has responded to its neighbors'
complaints with bilateral trade agreements, it is un-
likely that Brazil is willing to give up its trade surplus.
to South America, compared with only 7 percent for
Venezuela. Argentina's exports to South America are
concentrated in grains, fruits, vegetables, vegetable
oils, and semifinished metals. Especially hard hit by
the contraction in South American trade, Argentina's
exports to the region fell by more than $500 million
between 1980 and 1984, the largest decline in the
region. While Argentina's primary regional trading
partner is Brazil, it also is the major customer for
Bolivian natural gas exports. Argentina, however, has
just reduced the price it pays for natural gas
purchased from Bolivia, according to press reports.
Under its agreement with the International Monetary
Fund, Argentina is required to substantially reduce its
government deficits and specifically to eliminate the
deficit for Gas del Estado, a state-run gas enterprise
that purchases natural gas from Bolivia, according to
diplomatic reporting.
Argentina and Venezuela: Also Major Exporters.
Argentina and Venezuela are the other leading South
American traders, each with annual exports within
the continent of more than $1 billion. Argentina has a
more regionally oriented economy than Venezuela
and exports more than 14 percent of its total exports
On the other hand, Venezuela exports mostly crude
petroleum to the region, with nearly 50 percent going
to Brazil. Venezuela's exports declined by more than
$250 million, or about one-fifth, between 1980 and
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Brazil: Tensions From Its Regional Trade Surplus
Brazil's current trade goal is to maximize its trade
surplus, according to diplomatic reporting. It is
achieving part of this goal through its trade with
South America, recording a surplus with all of its
neighbors except Venezuela during 1983 and 1984. In
response to their trade deficits, Brazil's neighbors are
calling for more balanced trade with Brazil.
Brazil has responded to these complaints with bilat-
eral trade agreements outside the Latin American
Integration Association (LAIR), the region's trade
organization. During the past year, Brazil agreed to:
? Increase wheat and oil imports from Argentina.
1984. One of its smallest regional trade partners is
Ecuador, with which Caracas signed a $2.4 million
trade agreement last year in an effort to stimulate
trade. According to press reports, Venezuela will
export steel and aluminum byproducts, while Ecuador
will sell marine, chemical, and technical products.
Other Exporters. Slightly more regionally oriented
than the major exporters, South America's medium-
size exporters (Chile, Colombia, Peru, and Uruguay)
also suffered major losses in regional sales between
1980 and 1984:
? Increase imports of rice, beans, and metallurgical
coal from Colombia.
? Make a $600 million countertrade deal with
Peru-a fourfold increase in bilateral trade from
the 1984 level-to import Peruvian oil and miner-
als, while exporting food and manufactured
products.
ing grains, livestock, and dairy products.
These trade agreements, however, will probably have
a more political than economic effect because Brazil
most likely is unwilling to give up its trade surplus
position. Brazil's 1985 drought, however, should also
contribute to increased imports offoodstuffs, includ-
Brazil probably will take a leadership role in LAIR
efforts to increase regional trade. Some countries,
however, may feel that Brazil is merely trying to
increase its regional trade surplus and might resent
Brazilian leadership in the trade effort.
? Chile exports metals, mostly copper, to Brazil and
Argentina. Its exports suffered the region's second-
largest drop over the period, falling by more than
$500 million.
? Colombia's regional exports decreased by more than
$200 million between 1980 and 1984, as Venezue-
la-its main trading partner-cut manufacturing
imports from its neighbor.
? Peru also exports mostly copper to Brazil and
Argentina. Its exports fell from $500 million to
$280 million.
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Figure 2
South America: Distribution of Trade, by
Countrya and Commodity, 1983b
? Food
Agriculture, raw
Fuels
E:1 Manufacturing
Other
materials
Minerals and metals
Chile
Colombia
Ecuador
Paraguay
Peru
Uruguay
Venezuela
a Including Mexico.
b Or latest available year.
c 1982 data for Bolivia, Paraguay, and Peru.
d 1979 data for Bolivia and Paraguay; 1982
data for Ecuador and Peru.
? Uruguay sells grains, meat, semifinished goods, and
chemicals to Argentina and Brazil. Among the
medium-size exporters, Uruguay's share of its total
exports destined for South America is the largest-
about 15 percent. Its regional exports fell by more
than $160 million to $227 million.
South America's smallest exporters (Bolivia, Ecuador,
and Paraguay), with the most regionally oriented
0 10 20 30 40 50 60 70 80 90 100
I I I i
Argentina
Bolivia
Brazil
Chile
Colombia
Ecuador
Paraguay
Peru
Uruguay
Venezuela
economies in the region, experienced varying losses in
exports during the same period:
? Bolivia is the most dependent of the South Ameri-
can countries on sales to its neighbors-more than
50 percent of total exports. It experienced an 18-
percent loss in regional exports, sheltered by its
natural gas sales contract with Argentina.
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secret
Smuggling: The Underground Regional Trade
The restrictive trade policies of South American
governments have fostered widespread smuggling of
crops, minerals, and consumer goods throughout the
region, according to US Embassy reporting. Illegal
exports to neighboring countries are encouraged by
high export taxes, overvalued exchange rates, and
low producer prices paid by government parastatals
to commodity producers. Contraband imports are the
result of severe import restrictions particularly on
luxury goods-levied in an effort to halt the outflow
offoreign exchange.
Although precise estimates of such underground
trade in South America are difficult to make, the
evidence indicates that the value involved is several
billion dollars each year and is an important element
in the local economies:
? Paraguay's smuggling network accounts for half of
the country's foreign trade and employs 15 percent
of the labor force, according to an Embassy study.
Illegal imports of Argentine wheat and flour-
around 150,000 metric tons per year-have sabo-
taged the government's food self-sufficiency pro-
gram. Most of the motor vehicles on Paraguayan
roads were originally stolen in Brazil or Argentina,
and much of the packaged food sold is contraband.
On the export side, $350-700 million of cotton and
soybeans go unrecorded to Brazil each year, along
with large amounts of timber, cattle, meat, and
leather.
? Argentina's total illegal trade in 1984 was about
$1.7 billion, according to Embassy reporting. Al-
though more than $1 billion is believed to be from
unreported exports to the world market, much of
the rest is consumer goods trade with Paraguay,
Brazil, and Uruguay. A crackdown in December
1984 in a town bordering Paraguay netted $40,000
in contraband in two days.
? Brazil's biggest contraband export to neighboring
countries is coffee-we estimate around 800,000
bags in 1985. Most of the gold mined in Brazil is
smuggled out and usually shipped directly to Eu-
rope or the United States. In past years, much of
the soybean crop went out through Paraguay, but
pricing policy shifts have reversed the flow. In the
Brazilian states along the border with Bolivia and
Paraguay, consumer goods smuggling is a major
industry. Embassy sources claim a significant
amount of contraband consumer electronics trade
is shipped in trucks and airplanes along with
narcotics.
? In Colombia academic studies estimate that illegal
exports of manufactured goods to Brazil, Venezue-
la, Ecuador, and Peru have ranged from $100-200
million annually in recent years. Banned consumer
goods, including everything from Brazilian ciga-
rettes to Venezuelan televisions, are plentiful in
Colombian cities. Experts there believe retail goods
smuggling employs 100,000 workers in Colombia's
largest cities.
Although we believe widespread contraband trade
has boosted the underlying health of South American
economies, smuggling undermines government efforts
to service the foreign public debt. By ignoring official
export channels, smugglers keep hard currency for-
eign exchange for themselves rather than channeling
it through the central bank.
In the longer run, perhaps the most damaging effect
of smuggling is that it promotes the status quo among
vested interests: many powerful individuals and offi-
cials-particularly in Bolivia and Paraguay-are
heavily involved in smuggling and would view eco-
nomic liberalization as a threat to their business. In
addition, black markets defuse civil unrest over
economic matters by supplying more and better
goods-reducing public pressure for policy reform.
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Figure 3
South America: Regional Exports, 1980 and 1984
Uruguay 4.1
Bolivia 4.3
Ecuador 4.6
Peru 5.3
? Ecuador exports mostly fuel to Brazil, Chile, and
Colombia. Its exports fell by almost three-fourths,
the largest percentage decline in the region.
? Paraguay relies upon food exports-mostly grains-
to Brazil. Its exports to South America fell by only
about 15 percent.
The Key Constraints: Economics,
Trade Policy, and Geography
In our view, the problems of South American regional
trade have their roots in three broad areas: economics,
trade policy, and the geography of the South Ameri-
can continent.
Economics. A key constraint to South American trade
is the lack of economic diversification in the region.
Although endowed with a wide variety of natural
resources, South America's economies, except Bra-
zil's, are not well developed and usually concentrate
on only a few types of commodities, many of which
are suffering low prices. Moreover, in several cases,
countries are competing with each other to sell the
same product. Both Colombia and Brazil are large
Paraguay 1.71 rEcuador 1.7
Uruguay 3.4 I I
Peru 4.1
Bolivia 4.6
Colombia 4.7
F
Venezuela 16.4
coffee exporters, while Venezuela and Ecuador export
fuel to the region. Argentina and Paraguay both
export soybeans to Brazil.
The debt crisis has played a major role in the
contraction of regional trade in the 1980s and has
further shifted the relative orientation of South Amer-
ican trade from the region to the rest of the world.
With an external debt that increased more than 50
percent to $248 billion between 1980 and 1984, South
America was forced to adopt austerity measures: it
cut imports, including those from the region, and
targeted exports to developed countries to earn foreign
exchange. While imports from outside South America
dropped by almost 40 percent to $33.7 billion between
1980 and 1984, South American exports to the rest of
the world increased 8 percent to $59.6 billion. The
United States absorbed much of the increase in the
region's exports to non-South American markets; the
US share of OECD imports from South America rose
from about one-third to one-half between 1980 and
1984.
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Figure 4
South America : Exports to OECD, 1980 and 1984
Canada-4.1
Italy-6.4
Trade Policy. In our view, South American trade
policy has been a more serious constraint than eco-
nomics to regional trade. In large part as a result of
import substitution-based development policies, South
America's trade policies have been intended to devel-
op and protect domestic markets, especially in manu-
facturing, as well as to conserve foreign exchange.
Although South America has organizations to pro-
mote regional trade, individual country trade restric-
tions, including tariff and nontariff barriers, usually
apply to all trading partners.
We believe that, because of the region's product mix,
these policies have had a particularly adverse impact
on regional trade. In our judgment, Colombia's high
tariffs on automobiles and textiles, for example, have
helped limit exports from other automobile produc-
ers-like Brazil-and textile producers-like Peru-
in the region. Brazil's high tariffs on automobiles,
textiles, and paper have likewise restricted exports
from producers of these goods in the region.
South American countries extend some tariff prefer-
ences to neighboring countries, but the preferences
are generally too small to produce a significant in-
crease in regional trade. A 1984 regional tariff prefer-
ence agreement, produced under the auspices of the
Latin American Integration Association, the region's
trade association, reduced tariffs a maximum of only
7 percent below those on goods imported from outside
South America. Moreover, regional tariff preferences
are relatively meaningless if the country provides
exemptions from import tariffs for exporters from
outside the region, as the LAIA found to be the case
in Brazil, Argentina, and Colombia. Finally, regional
tariff preferences are sometimes withdrawn if a coun-
try wishes to protect a domestic industry. Argentina,
for example, recently suspended its tariff preference
for electronics imports from Brazil, Chile, Mexico,
and Uruguay to shelter its emerging electronics indus-
try, according to press reports. Argentina will now
charge tariffs of up to 90 percent on electronics
imports from these countries.
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Failure of South American Trade Organizations
In an attempt to counter the generally protectionist
trade regimes of the continent, South American coun-
tries have set up regional trading organizations. On
balance, however, they have done little to liberalize
policies that affect regional trade.
Latin American Integration Association. The 1980
Treaty of Montevideo created the Latin American
Integration Association-comprised of Argentina,
Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay,
Peru, Uruguay, Venezuela, and Mexico-that re-
placed the 20-year-old Latin American Free Trade
Association, which was considered by an Inter-Amer-
ican Development Bank study to be relatively unsuc-
cessful. Although LAIA was created to promote
regional trade, its tools are limited mainly to tariff
preferences. In 1984 LAIA members reduced tariffs
among themselves compared with those charged
countries outside the region. The agreement reduced
regional import tariffs by 5 to 7 percent for the less
developed South American nations of Bolivia, Ecua-
dor, and Paraguay; 3 to 7 percent for Chile, Colom-
bia, Peru, Uruguay, and Venezuela; and 2 to 5
percent for Argentina, Brazil, and Mexico. The tariff
revisions probably will not meet with much success,
however, because of the small size of the decrease.
Moreover, tariff preferences often are given to non-
South American trading partners to attain develop-
ment goals. As much as 74 percent of Brazil's imports
from outside the continent are not subject to tariffs,
and slightly less than half of Argentina's and Colom-
bia's non-South American imports are exempted
from tariffs, according to a 1984 LAIA study. F_
South America's nontariff barriers, established as
part of austerity programs or to protect domestic
economic sectors, have also negatively affected re-
gional trade. Peru, for example, banned 200 types of
"nonessential" imports last year, including textiles,
garments, shoes, domestic appliances, paints, tires,
and office equipment, to conserve foreign exchange.
South American
auto producers, such as Argentina, Brazil, Colombia,
Uruguay, and Venezuela, have restricted imports of
LAIA recognizes that further trade integration is
dependent on the political will of the group's mem-
bers to negotiate effective trade agreements. Under
LAIA, Argentina and Brazil now have bilateral tariff
preference agreements with all of their regional
neighbors, while the rest of South America has
agreements with at least three other LAIA members.
In addition, agreements among LAIA members that
reduce tariffs for certain industries have been devel-
oped and are being updated by the private sector-
subject to government approval providing the poten-
tial for more dynamic integration. These agreements
cover electronics and electrical communications, of-
fice equipment, domestic appliances, refrigeration
and air conditioning equipment, pharmaceuticals,
chemicals, petrochemicals, photography, and para-
medical equipment.
Andean Pact. The Andean Pact is a subregional
economic integration organization-including Vene-
zuela, Colombia, Ecuador, Peru, and Bolivia-estab-
lished in 1969 to promote economic and trade cooper-
ation and development. The members promised to
eliminate by 1980 duties and other restrictions on
trade among themselves, but they failed to reach
their goal because of continued domestic protectionist
pressures. The group has also been unable to agree to
a common external tariff and a coordinated economic
policy. Furthermore, sectoral programs and assis-
tance for the less developed countries of Bolivia and
Ecuador have not met with much success.
autos and auto parts through prohibition, local con-
tent requirements, and licensing to protect their do-
mestic markets. The local content regulations have
almost certainly reduced the production efficiency of
all the region's auto manufacturers. In addition,
several of the region's textile and apparel producers,
such as Brazil, Ecuador, and Venezuela, limit imports
of these goods and, therefore, regional trade through
licensing, prohibition, and other import substitution
measures. In newly developing industries, such as
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electronics, nontariff barriers have restricted the de-
velopment of regional trade: Brazil bans mini- and
micro-computer imports, and Argentina limits elec-
tronics imports through licensing measures.
country. Gradually, road and rail links were formed
over the last century, but most new construction still
serves local needs.
Finally, many South American countries have deval-
ued their currencies as part of their debt-related
austerity measures, provoking retaliatory trade mea-
sures within the region. As a result of currency
devaluations in Venezuela, Ecuador, and Peru, Co-
lombia recently announced that it would impose
restrictions-primarily prior licensing requirements-
on selected imports from these countries, according to
Embassy reporting. Colombia is attempting to protect
its domestic industry in the face of more price-
competitive regional imports. Neighbors' exports that
will be affected by Colombia's action include petro-
leum, chemical petroleum byproducts, asphalts, auto
parts, resins, and lumber and sea products. Venezuela
is concerned that restrictions on these products would
set a precedent for restrictions on more important
products, especially steel and aluminum, according to
the US Embassy in Caracas.
Geography. Even if trade policies were to shift more in
favor of the region, trade would remain constrained
by many elements of South America's physical and
cultural geography. The high Andes, the river-laced
Amazon Basin, and other inhospitable terrain present
formidable natural obstacles to movement and com-
merce. Moreover, great distances separate most of the
major national core areas, and the overall transporta-
tion network is woefully inadequate. Since the colo-
nial period, ports, roads, and railroads have been built
primarily for the collection and shipment of goods
overseas, not to facilitate trade among neighboring
countries. We believe that limited financial resources
and burdensome foreign debts will continue to limit
construction of new roads and other infrastructure
that could help overcome isolation and stimulate
regional trade.
The elongated shape of South America and its settle-
ment patterns do not favor regional trade. The conti-
nent extends nearly 7,500 kilometers north-south, and
about 5,000 kilometers east-west at its widest part.
The core area of each country developed in relative
isolation-a pattern deliberately enforced during the
colonial period to promote dependence on the mother
The massive Cordillera de los Andes, the most obvious
physical barrier to commerce, is a rugged range of
high mountains that extends along the entire length of
western South America and defines political bound-
aries for several nations, especially Argentina, Bolivia,
and Chile. Generally, its crest is more than 3,000
meters high, and elevations in excess of 6,000 meters
are common. Few all-weather roads cross the range,
and those that do are closed periodically by winter
snows, high winds, fogs, falling rocks, and landslides.
Within the region, roads are confined to north-south
trending valleys or parallel the Pacific coast. Al-
though paved, most of the roads include switchback
turns, rutted surfaces, and potholes that substantially
reduce driving speeds.
The vast forest-covered Amazon Basin, extending
across the broadest portion of the continent, isolates
northern countries from the rest of South America.
Roadbuilding and maintenance are difficult and ex-
pensive because of rough terrain, dense tropical forest,
endemic disease-especially malaria-and erosion
from torrential tropical rains. Building materials are
often unavailable locally and, along with fuel and
equipment, must be hauled hundreds of kilometers.
At present, existing transportation links-are barely
adequate to support current trade, and considerable
new capacity would have to be added to promote any
substantial increase. Water transport carries most
regional trade-both by weight and value-partly
because the major ports are located in economic core
areas and partly because overland routes are poorly
developed. The most important commodity is Venezu-
elan oil sent to Brazil. Timber, agricultural products,
ore, and manufactured goods are also shipped by sea
to trading partners in South America. All countries
except landlocked Bolivia and Paraguay have one or
more ports for oceangoing vessels. Riverboats serve
Paraguayan ports, but navigation is difficult because
of constantly changing river beds and sandbars, and
most cargo is now moved by truck.
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Figure 5
South America: Primary Transportation Network
Santa La
Barranquilla Maltt}v~`r / ~Guaira*
E AAc\ Y / 111 ~v't a ' a e: CARACAS
San Mi
de Tact
Neuquen
ASUNCIO
Sao
Corumha Pa?"
LIMA
BOGUTA0e
Cus co
V eezue1la
CP
,,GEORGETOWN
J, PARAMARIBO
Guya a" French Guiana
m ;x France)
`JLry11 uriname Cayenne
[1R
1
ikZ0N
` '.Pt~a c r.. ,f /' Be! ~?~SaoLois
s
Fortaleza .
BRASILIA
Picos~\
South
Pacific
Ocean
Boundary representation is
not necessarily authoritative.
'ralkland Islands
(Islas Malvinas)
(administered by U.K.,
claimed by Argentina)
North
Atlantic
Ocean
South
Atlantic
Ocean
- - Other selected road
~-- Major railroad
Major port
11a Major international
airport
500 Kilometers
1 ' 7
500 Miles
South Georgia
,,~falkland Islands)
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South America: Surface Transportation by Region
The Developed Southeast. Road and rail links be-
tween core areas of Argentina and Brazil-the most
developed portion of the continent-and also Para-
guay and Uruguay carry much of the trade among
those countries. There are no significant physical
barriers, other than the major rivers-the Rio de la
Plata, Parana, and Uruguay-that are crossed at
several key locations by bridges and elsewhere by
ferry. Argentina and Brazil are likely to continue to
improve transportation links to projects like the
bridge over the Parana near Foz do Iguacu, sched-
uled for completion in 1987. Increased integration of
the road network would reduce overland transporta-
tion costs and help foster regional trade in the
southeastern portion of the continent.
Northern Andes. The Pan American Highway system
and several other all-weather roads are the primary
overland trade links between Venezuela, Colombia,
Ecuador, and Peru; railroads play no direct role in
regional trade. Two important all-weather roads
connect Colombia and Venezuela-one along the
Caribbean coastal lowlands, the other one, the PAH,
crosses farther inland. The PAHfollows intermoun-
tain valleys and is the only paved highway linking
Colombia, Ecuador, and Peru. Although considered
all-weather, driving conditions are physically diffi-
cult in some areas and congested in others. There are
no overland links along the Colombia and Peru
border, which lies east of the Andes in the Amazon. A
pipeline transports oil from Venezuela to Colombia.
Central Andes. The Pan American Highway system,
the only land link between Peru and Chile, is a two-
lane paved road in good condition. It remains un-
paved across the desert of southern Peru and through
much of Bolivia. Rugged mountains make roadbuild-
ing exceedingly difficult and expensive; consequently,
most trade between Chile and Peru moves by coastal
freighter. Landlocked Bolivia is dependent on rail
lines traversing high Andean passes from the Altipla-
no to the Chilean ports of Arica and Antofagasta.
The former route is complicated by a gauge change
and steep slopes requiring rack and pinion tracks. In
the south, Bolivian rail lines cross into Argentina, a
primary source of grain. Pipelines carry Bolivian oil
and gas to Chile and Argentina. During the 1980s,
assisted by development banks, Bolivia has added
bridges and paved portions to its part of the PAH and
built some 400 kilometers of new rail in the Amazon,
an ambitious undertaking for an impoverished na-
tion. These efforts do not extend to the borders and
are not, therefore, a factor in regional trade.
Southern Andes. The Argentine-Chilean border fol-
lows the crest of the Andes and, although 5,300
kilometers long, is crossed by only one paved road,
the Pan American Highway, and two rail lines.
Several unpaved roads are used seasonally, but
snows, high winds, and landslides preclude use much
of the year, especially in the southern portions of the
border. Ship transport around the southern tip of the
continent is the primary trade link.
The Amazon. Transportation in the Amazon Basin is
underdeveloped because of great distances and sparse
settlement. The Amazon River and its tributaries are
primary avenues for commerce, but planners are
pushing for speedier means of transport. A number of
pioneer roads are being built, and Bolivia is extend-
ing a rail line in the southern portion of the basin.
However, the Carretera Marginal de la Selva, a
highway in Bolivia, Colombia, Ecuador, and Peru on
the drawing board for more than 20 years, is largely
incomplete. In Brazil, construction of the Trans-
Amazonas has been abandoned and the Perimetral
Norte begun in only a few places. By contrast, the
Perimetral Sur has been paved as far as Porto Velho
and work is progressing westward into Acre state,
promoting rapid settlement. However, the highway
will do little to expand regional trade until it is
opened to the Pacific through Peru.
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Land routes link all South American countries to at
least one or more paved roads except for Guyana,
Suriname, and French Guiana, which are virtually
isolated from the rest of the continent. The Pan
American Highway (PAH) system, several other im-
portant roads, and a few rail lines are the primary
overland trade routes. The PAH links most of the
capitals of South America, but not all of the major
ports. Much of the rail equipment and tracks are
antiquated. The best developed regional transporta-
tion network links the economic core areas of Argenti-
na, Brazil, Uruguay, and Paraguay. But even among
these countries, the links are tenuous.
Air transport is important to the tourist trade and
communications among distant cities-especially in
the Amazon Basin, where there are few roads. Air
cargo service is generally limited to high-value, low-
weight cargoes, such as electronics products, precious
metals, and illegal narcotics. Increasingly, smuggling
involves the use of small aircraft and clandestine
airfields in remote locations beyond government con-
trol.
Expanding and integrating the transportation infra-
structure is widely regarded as a means of stimulating
regional trade. For example, the Brazilian Minister
for Transportation renewed calls in early 1986 for the
construction of a road through Acre state to the
Peruvian port of Callao, and another through Rorai-
ma territory to Venezuelan ports on the Rio Orinoco,
to expand Brazil's trade with Peru and Venezuela and
to provide access to the Pacific and the Caribbean.
Construction of transcontinental rail lines has also
been proposed: one would traverse southern Brazil,
Bolivia, and Chile; another line, also through Bolivia,
would link Lima to Buenos Aires. A 45-kilometer
section of track along Lago Titicaca would have to be
built, but, even if it is, required gauge changes
between countries would limit the usefulness of these
lines. Progress will be slow. Lack of money and large
foreign debts will discourage lenders who might other-
wise finance construction, and transcontinental rail
lines and Amazonian links to the Pacific and the
Caribbean will not be completed during this decade.
Policy Shifts Considered
Because of the plunge in regional trade during the
1980s, South America's leaders are focusing in-
creased attention on their ability and need to expand
regional trade. Bilateral agreements are being in-
creasingly used as a way to achieve balanced trade
between trading partners and to expand regional
market potential; these trade agreements are often
easier to negotiate than multilateral ones.
Despite the failure of LAIA and the Andean Pact to
accomplish much in the way of trade liberalization,
Latin leaders are again talking about using the two
organizations to boost regional commerce. The LAIA,
for example, has outlined the following goals to
strengthen regional trade integration:
? Promote and establish new sources of goods and
services in the region to replace those currently
being imported from outside South America.
? Correct trade imbalances.
? Improve trade finance mechanisms.
? Establish programs to increase production of non-
competing products.
? Assist less developed member countries-Bolivia,
Ecuador, and Paraguay.
? Eliminate obstacles to regional trade.
? Increase cooperation in regional transportation and
communication.
Much of this is rhetoric. South America's leaders,
several of whom were recently elected to office, are
acutely aware of the demands of their constituents
and would be reluctant to undertake measures that
could damage sectors of their own economies for the
sake of potential region-wide gains. We believe the
best chance for action lies in improving the region's
trade finance system-the Reciprocal Payments and
Credits Agreement (RCPA). The RCPA facilitates
regional trade through a trade credit clearinghouse
mechanism that allows LAIA members to trade using
domestic currency. The outlook is favorable for im-
proving the trade finance mechanism because it al-
lows trading partners to conserve foreign exchange.
Opportunities for shifting the sources of goods and
25X1
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out Art
The Latin American Integration Association's
Trade Finance Program
The Latin American Integration Association facili-
tates regional trade through the use of a trade credit
clearinghouse and a liquidity support facility. LAIA's
Reciprocal Payments and Credits Agreement (RPCA)
allows its members, as well as the Dominican Repub-
lic, to trade using domestic currency, thereby con-
serving scarce foreign exchange. The central banks of
participating countries act as agents for the agree-
ment. In an Argentine-Brazilian transaction, for ex-
ample, the Argentine exporter would be paid by the
Argentine Central Bank in australs, and the Brazilian
importer would pay the Brazilian Central Bank for
the goods in cruzados.
Daily bilateral transactions between South America's
central banks are covered by a bilateral credit line
that operates over a four-month period. When the
debits exceed the credit line, the creditor Central
Bank may ask the debtor Central Bank for immedi-
ate payment of the excess debt in advance of the
settlement deadline. At the end of the period, debits
between central banks must be settled with a convert-
ible currency.
Transactions channeled through the RPCA peaked at
$9.3 billion in 1981. As a result of the contraction in
regional trade, the flow of funds dropped to only $6.0
billion in 1983. During January-August 1985, how-
ever, clearing transactions amounted to $4.7 billion,
compared with $4.1 billion for the same period in
1983. Foreign currency was required in only 20
percent of the total transactions during this period,
and only I percent of total transactions required
advance payments.
? Financing for clearing of RPCA balances.
? Financing for overall balance-of-payments deficits.
? Financing for liquidity shortfalls caused by natural
disasters.
A central bank must have posted either a deficit or a
reduction in its surplus in clearing transactions
through the RPCA to qualify for support under the
Santo Domingo Agreement. In addition, credits
granted under the support mechanism are for a term
of four months and can be renewed three times. As of
mid-1983 the support facility had been used 24 times,
for a total of $419 million, based on an initial capital
of $263 million.
The Andean Pact's Andean Reserve Fund (FAR),
established in 1976, provides support for member
countries experiencing balance-of-payments prob-
lems. FAR's capital was increased to $500 million in
October 1986, doubling its initial capital outlay.
FAR has provided assistance to Bolivia, Ecuador,
Colombia, and Peru on several occasions, according
to press reports.
Plans for future trade finance development include
LAIA's consideration of an RPCA expansion, al-
though we doubt whether LAIA members will be able
to develop a working regional currency in the near
future. The Andean Pact, however, has introduced a
regional currency-the Andean peso-which was
used to cancel Andean Pact trade obligations for the
first time in September 1985. Moreover, Peru has
proposed a Latin America Monetary Fund (FML) to
partially replace the IMF. The FML reportedly
would be based on the Andean Reserve Fund. Peru's 25X1
proposal, however, has elicited no support from other
Under the Santo Domingo Agreement, LAIA mem-
bers and the Dominican Republic provide reciprocal
support and assist member banks in coping with
temporary liquidity problems. The agreement pro-
vides for three types of financing:
South American governments.
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services from non-South American to regional trad-
ing partners are also favorable as long as the countries
concerned do not perceive unequal benefits resulting
from the trade shifts.
The Andean Pact has been meeting since 1985 to try
to revive subregional trade integration, but the group
has not made much progress because individual mem-
bers insist on keeping existing trade restrictions,
according to diplomatic reporting. During the Andean
Pact's 12-16 May 1986 meeting on trade, members
were only able to agree informally on:
? Requiring limited importation of 30 to 50 products,
formerly banned for protection of domestic
producers.
? Permitting temporary protection of domestic pro-
duction if disrupted by competing imports from
other Pact members subject to review by the Pact.
? Eliminating nontariff barriers and lowering import
duties applied to Bolivian and Ecuadorean exports
to Pact countries.
? Requiring Pact countries, except Bolivia and Ecua-
dor, to apply the most-favored-nation clause to
fellow members if the clause is extended to non-Pact
trading partners.
Pact leaders, however, have yet to agree formally on
these proposals. Pact countries will find it politically
difficult to repeal trade restrictions in view of their
countries' high unemployment and economic difficul-
ties, according to diplomatic reporting. Although the
group's restrictive investment policy most likely will
be revised in the future, we believe investment in the
Andean countries will still be unattractive because of
government policies and small national markets rein-
forced by high tariff barriers.
There is some evidence of greater trade cooperation
among the more developed countries in the region.
Argentina, Brazil, and Venezuela agreed last year to
cooperate in the steel market with the support of the
Latin American Economic System (SELA)-a Latin
American organization of 26 countries established in
1975 to promote regional industrial cooperation-to
expand regional steel trade and increase their access
to developed country markets. We have seen nothing
yet, however, to indicate what specific actions are
being taken. Another example of cooperation involves
Brazilian and Venezuelan steel companies working
together to circumvent the US-Brazilian voluntary
restraint agreement on steel exports to the United
States. The Brazilian steel firm plans to ship slab to
Venezuelan steel companies that would then sell the
slab to the United States. US steel imports from the
three countries amounted to 6 percent of total US
steel imports in 1984.
Regional trading partners have also been cooperating
in the area of chemicals and pharmaceuticals. In
1984, Brazil, Argentina, and Mexico's health minis-
ters agreed to combine production and share markets
in pharmaceuticals and chemicals under the auspices
of the Pan American Health Organization (PAHO),
according to diplomatic reporting. The ministers indi-
cated that some self-sufficiency has been achieved in
these industries and that they could cooperate to
obtain quality drugs at lower prices. Although
PAHO's director stated that his organization had no
interest in excluding non-Latin companies from Latin
American markets, this type of program could ad-
versely affect foreign pharmaceutical companies oper-
ating in the region.
Issues Ahead
Despite domestic political pressures, South American
leaders are likely to view invigorating regional trade
as being increasingly in their interest. We believe this
drive will be strongly influenced by a growing cadre of
economic decision makers in many of the new govern-
ments who view economic growth and self-reliance as
the cornerstone of their economic policy. In our
judgment, this desire to become less dependent on
access to developed-country markets is likely to be
reinforced by:
? The increasing threat of protectionism in Western
countries, especially the United States.
? The need of debtor countries to at least match
increasing debt servicing burdens with like increases
in export earnings.
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OCITCL
? The increasing demand for economic structural
reform as a prerequisite to enhanced financing by
international financial institutions. Export expan-
sion and diversification have been cited as key
elements of such a reform effort by the World Bank
and as part of the US initiative on debt.2
South American success in expanding exports to each
other will also be in the long-term interest of the
United States:
? Expansion of regional trade would, in our judgment,
promote economic growth and stability for recently
established democratic governments like Argentina,
Brazil, and Uruguay.
? Moreover, enhanced exports to regional markets
could relieve some pressure for greater access to the
US market and increase the capabilities of South
American debtor countries to make debt payments
to US institutions.
More regional trade integration in South America is
not without its risks, however. In the short run, US
exports could suffer as South American countries
strive to expand trade with each other. For example,
cooperation among South American countries to
share regional markets for specific products, such as
pharmaceuticals and chemicals, could hurt US ex-
ports of these items to the region. In the long run,
however, if trade expansion stimulates economic
growth and development, opportunities for US exports
to the region should increase.
Expanding regional trade will not be easy. To expand
regional trade, South American countries need to
develop further new product lines; these lines might
include processing the raw goods that they now
' US Treasury Secretary James Baker proposed a new program for
sustained growth in debtor countries on 8 October 1985 at the joint
IMF-World Bank meeting in Seoul, South Korea. The US initia-
tive on debt called for further economic structural reforms by
debtor countries to promote economic growth, hold down inflation,
and improve balance of payments. Debtor countries that adopt such
reforms would be eligible for up to $29 billion in new lending over
the next three years-$9 billion from the World Bank and other
multilateral development banks and $20 billion from commercial
export, such as food and raw agricultural materials.
In addition, producers of semifinished goods, for
example, metals, could expand exports of these goods
to other South American countries for further pro-
cessing. However, for industries considered key to
national interests-such as electronics and automo-
biles-we believe chances are slim that producing
countries will substantially open their domestic mar-
kets to regional imports in the near future. Efforts
toward greater trade integration could particularly be
stymied if countries perceive that a dominant part-
ner-say Brazil-is benefiting at their expense.
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Appendix A
1975 1980 1984 1975 1980 1984
Argentina 580.3 1,729.2 1,204.9 851.9 2,066.5 1,588.2
Argentina 0 0 0 0 0 0
Brazil 1,071.0 2,989.0 2,545.0 637.0 2,426.0 1,607.0
Argentina 381.0 1,092.0 853.0 252.0 841.0 539.0
Bolivia 122.0 180.0 141.0 17.0 47.0 16.0
Brazil 0 0 0 0 0 0
Chile 100.0 451.0 281.0 112.0 462.0 240.0
Colombia 29.0 136.0 171.0 13.0 10.0 6.0
Ecuador 27.0 50.0 141.0 6.0 36.0 2.0
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Direction of South American Regional Trade (continued)
Brazil
Chile
Colombia
220.5
531.4
319.1
135.8
635.7
844.2
Argentina
27.8
68.7
24.2
18.6
42.8
65.2
Bolivia
6.5
2.2
0.4
1.1
7.4
1.4
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Direction of South American Regional Trade (continued)
19 Secret
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Direction of South American Regional Trade (continued)
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Secret
Secret
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