Trade Policies, Macroeconomic Adjustment, and Manufactured Exports: The Latin American Experience

August 1995

The author examines the relationship between trade policies and macroeconomic adjustment in six Latin American countries: Argentina, Brazil, Chile, Colombia, Costa Rica and Mexico. For the period 1965-94, the six countries experienced 26 trade policy episodes: 11 tightening, and 15 loosening of trade policies. For the analysis, the author worked with four periods that coincided with diffreent prevailing exchange rate regimes: 1965-73, 1974-79, 1980-83 and 1984-04. Using a probit model, he examined the relationship between tightening and loosening trade policies and the current account balance, the exchange rate, and the growth in manufactured exports. His main conclusions: 1) experience in these six countries for 1965-94 confirmed the hypothesis that trade restrictions cannot solve current account problems; 2) for trade liberalization to work, there must be real devaluation either before or during liberalization. Reluctance to devalue, for one reason or another, may lead to trade restrictions. There is evidence that trade restrictions were used in lieu of devaluations during 1965-83. In 1984-94, however, the reluctance to devalue was overcome; 3) growth in manufactured exports helps maintain trade reform and release the economy from foreign exchange constraints. As expected, trade liberalization improved exports (liberalization reduces the bias against exports) while trade tightening hurt them; and 4) The impact of trade reform on the fiscal system cannot be predicted because tax revenues can go in either direction depending on initial conditions, the elasticity of supply in importable and exportable sectors, and the economy's growth rate.