Argentina, Brazil, Business, Emerging Markets, South Korea, China - Mon April 13, 2015

LatAm leaders seeking to repeat Korea’s miracle return empty handed

LatAm delegates who struggled with the 40-hour journey to get the IADB meetings in Busan are likely to return with harsh lessons on trade tariffs rather than a recipe to replicate South Korea’s economic miracle.

Why is the IADB conference taking place in Korea this year? To those in the multilateral itself, the answer is clear: to underline what they describe as the “fast and sustained” acceleration in commerce between South Korea and Latin America.

However, in reality, the benefits for South Korea have far outweighed those enjoyed by Latin American countries. Delegates, facing the exhausting 40-hour return leg back from in Busan, are likely to arrive home with harsh lessons on trade tariffs and imbalances rather than a recipe to replicate South Korea’s economic miracle.

Two-way trade, the IADB noted in a landmark report issued in March, entitled Korea and Latin America and the Caribbean: Striving for a Diverse and Dynamic Relationship, had expanded by 17% a year since the turn of the century, hitting $54bn in 2014. Both sides had benefited, with Latin America’s mix of exports to the East Asian state becoming both more diversified [and] more weighted toward manufacturing goods”.

That’s good news — and the reason why Latin America’s leaders have made the long flight this week. One official attending the meeting, having spent 30 hours in a plane and 10 more on the ground meeting connecting flights, compared the journey to “torture”.

But there was good reason to be here. Latin American leaders have come to envy Korea’s extraordinary success story. Economic output has grown by 7% a year over the past five decades, transforming one of the world’s poorest countries into a genuinely advanced industrial nation.

Alejandro Micco, Chile’s deputy finance minister, spent the week touring the country in search of ways to replicate the Korean model. He waxed lyrical about a new Chilean “innovation agenda” based on Korean norms and aimed at boosting R&D and improving public-private dialogue. “We want to learn” from Korea’s experience, he sighed.

Yet Latin America may have to learn fast. The IADB’s report highlights the challenge of replicating the Korean model in the likes of Chile, Brazil, Colombia or Argentina. Its chief argument — that the region’s trade relationship with Korea was becoming more balanced and diverse, with Latin America exporting more higher-margin, higher-end manufactured goods — appears flawed.

The trade relationship with Latin America is becoming increasingly imbalanced in Korea’s favour. Exports of finished Latin American-made goods dipped from 28.7% of the regional export mix over the three years to end-2010, to 21.3% over the next 36 months. The net result is a clear widening of the trade deficits Latin American governments report with the Republic of Korea.

Nor is the relationship likely to become genuinely “diverse, dynamic and sustainable”, in the near future. Latin America exports low-margin raw materials to Korea, while re-exporting higher-margin televisions and smartphones.

Worse, South Korea, whose vibrant agricultural industry is stoutly defended by vociferous farmers, continues to act in a protectionist manner toward soft-commodity producers. That forces the likes of Brazil and Argentina to pay “double-digit tariffs on agricultural exports”, with tariffs of more than 750% on processed or out-of-quota goods.

The IADB report makes gloomy reading for Latin American leaders preparing to make the long journey home. Korea’s import mix of Latin American goods has become less diversified and less sophisticated in recent years, not the other way around. The only lessons they are likely to have learned in Busan this week are hard ones.

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