Latin America has to work to reduce its transportation costs, thus making the region more competitive.
BY RICARDO ERNST
The need to reduce or eliminate tariffs to promote trade between countries has long been an issue of discussion. With the collapse of the Doha negotiations, the countries will have to find new ways to reduce the cost of foreign trade to maintain its global competitiveness.
A recent study by the Inter-American Development Bank indicates that the existence of lower transportation costs would boost the exports of strong increases in Latin America, surpassing any possible gain that the region could gain from reduced tariffs. According to the study, a 10 percent reduction in freight costs in nine Latin American countries would facilitate the increase in exports to the United States in an average of 39 percent. In contrast, a 10 percent reduction in import tariffs would result in only an increase of less than 2 percent in exports to the United States.
The high transport costs faced by Latin America comes from poorly maintained roads, congested airports and ports, and inefficient customs services. These problems increase the length and add additional costs to transport, erasing the region’s logistics advantage of proximity to the largest markets in the world.
What can countries do to reduce their transportation costs? These costs could decrease about 20 per cent if Latin America improves the efficiency of its ports to match the levels reached by the United States. Similarly, increased competition between transport companies, can help reduce transport costs by up to 4 percent. Governments can increase efficiency by improving the quality of port facilities. They can also expand the transparency of its procedures and improve the accuracy of their information systems in order to reduce costs. But above all, governments can reduce the legal restrictions, such as the requirement to have special licenses.
Without a significant improvement in transport, a greater presence of Latin America and the Caribbean in global markets will be difficult. The choice is clear. Latin America has to work to reduce its transportation costs, thus making the region more competitive, especially in heavy manufacturing.
In addition, exporters would be able to maintain a significant portion of their earnings, which is now transferred to cover the costs of an inefficient transport industry, enabling them to invest in expansion and measures to increase productivity.
Dr. Ricardo Ernst is deputy dean of the McDonough School of Business at Georgetown University and co-director of Global Logistics Research Program. He is also editor-in-chief of Globalization, Competitiveness and Governability. This column is based on his commentary on CNN en Español.