Trade with China: trade basket and economic growth in Latin America

The Latin American (LATAM)-China trade relationship is based on the exchange of Latin American commodities for manufactured goods from China. This paper aims to analyze the impact of the composition of the LATAM-China trade basket on the economic growth of Latin American countries. Based on a Cobb-Douglas production function, productivity is expressed as a function of exports to China, imports from China, China's share of overall U.S. imports, and other control variables. Exports destined for China are disaggregated into: (1) commodities, (2) low-tech manufactures and, (3) medium and high-tech manufactures while imports from China were broken down into: (1) consumer goods, (2) intermediate goods and, (3) capital goods. Non-exporting GDP to China is used as the dependent variable to remove the effect of exports on the national accounts. Regression analysis techniques are applied with panel data on 23 Latin American countries for the period 2002 - 2017. Considering the structural differences between countries in the region, the exercises are applied in two separate panels, one corresponding to South American countries (SA) and the second to Mexico, Central American and Caribbean countries (MCC). The results indicate that: (1) exports destined to China and imports from China exert negative and positive effects, respectively, on LATAM economic growth. The negative effects of exports to China are attributed to the commodity sector and low-tech manufactures while the positive effects of imports correspond to the three types of imported goods. The effects according to the composition of the trade basket are heterogeneous between SA and MCC, (2) the competition effect with China generates negative effects on SA's economic growth. The Latin American region needs to concentrate efforts to increase the share of medium and high technology manufactures in its export basket, in order to face the changes in international trade patterns both as a trading partner and as a competitor.