The Dynamics of Trade Integration and Fragmentation in LAC

Trade barriers and poor infrastructure play an important role in limiting trade integration in Latin America and the Caribbean (LAC). Closing half of the infrastructure gap between LAC and advanced economies could lift exports by 30 percent. Reducing import tariffs could boost LAC’s trade, but its responsiveness is lower than in other EMDEs, particularly in the long run, due to the region’s specialization in agricultural exports with inelastic demand and supply constraints like growing cycles and weather conditions. Amid deepening global trade tensions, LAC is well placed to withstand a mild trade fragmentation scenario, in which trade barriers are erected only among large economies. However, the region’s output losses could be sizable in more extreme scenarios, where the global economy splinters into competing economic blocs and LAC loses access to important markets. Boosting trade, including regional trade, could pay a double dividend of lifting growth in the region while mitigating risks from global fragmentation.