Nearshore Should be Embracing Gravity in New World Trade Dynamics

Jonathan D'Oleo uses the gravity model to explain the economic opportunities available to those countries in the strategically located Nearshore region.

gravity

In principle, international trade flows according to the laws of gravity. In that sense, trade is determined by two factors: the Gross Domestic Products and the geographical distance between trading partners. To calculate the trading possibilities based on this reasoning, economists use what is known as the gravity model.

Straightforwardly, this model suggests that the greater the economic mass (GDP) of two countries and the shorter the distance between them, the greater the amount of goods and services they will be able to exchange as they engage in trade.

Considering the distance factor in this formula, Nearshore economies in the Caribbean, Central and South American region (henceforth referred to as CCESAR, pronounced si’zār, like the Roman emperor) are strategically positioned to trade with the United States, the country that, amid the emergence of other super powers, remains the most important economic force in the world.

Chances to Meet Greater Trade Possibilities

Despite CCESAR’s geoeconomical advantage, its commercial exchange with the US is significantly below the trading possibilities inherent in its gravitational and contextual reality.

In 2016, the total amount of exports from CCESAR to the US was only about 10% more than Japan’s exports. While some may consider this spread to be encouraging, given the sophistication of the Japanese technological and industrial infrastructure, CCESAR has an aggregate GDP of $9.5 trillion, a total population of more than 550 million and a territorial extension of over 20 million square kilometers. When compared to Japan’s GDP of $5 trillion, population of 127 million and territorial extension of 400 thousand square kilometers, one must conclude that CCESAR is grossly underperforming in the arena of trade with the US.

The Spatial Factor

Having performed this comparative analysis at the economic, territorial, and demographic levels, we should, following the parameters in the gravity model, consider the spatial factor — the geographical distance that exists between the point of export and the point of import.

Japan, on the one hand, is 10,000 km away from the US. CCESAR, on the other, includes Cuba, which stands only 90 miles away from the south coast of Florida. Moreover, the time difference between CCESAR and the US ranges from 0 to 3 hours while Japan’s ranges from 13 to 16.

The facts make CCESAR’s gravitational advantages over Japan in relation to the US very obvious. Why then are the American regions south of Mexico displaying such a relatively low volume of trade with the US? The reasons are many. One of them is the dearth of capital infrastructure affecting the whole of CCESAR.

Additional Contributing Factors

Beyond issues having to do strictly with the economy, there are ideological, educational, cultural, moral, and institutional factors that play a preponderant role in determining the commercial and trading wherewithal of CCESAR countries.

Institutional weaknesses that feed on an overarching and pervasive patronage system are the leading coefficients. Out of this spring a multitude of structural cancers, such as legal uncertainty, overregulation, bribery, and extortion.

The best practice in the economic sciences is to identify the root of the problem. To that end, the question must be asked: where do institutional weaknesses come from? Put simply, they come from people. From the leadership, character, and intellectual acumen of those that make up the institutional framework that runs on the wheels of patronage systems.

What is the solution? 

Whereas a satisfactory solution necessitates the amalgamation of various elements, the implementation of a meritocratic system in the public sector would be a powerful force for good in the region. Such a system would greatly depoliticize public administration by draining the swamps of needless bureaucracies. This would, in turn, reduce the cost of doing business and pave the way for a more vigorous and consistent flow of foreign direct investment.

It is equally important that, in certain economic matters, CCESAR countries proceed in a concerted fashion. Integration, as a matter of fact, is the only way of significantly increasing the region’s economic gravitas. This is because very few CCESAR economies can reach minimum efficient scales of production on their own.

Furthermore, considering that export-led growth is built on producing fair quality at competitive prices, CCESAR countries must interweave a regional chain of production, one in which each country focuses on the economic activities that use intensively the factors of production they have in relative abundance. This, even as each country invests systematically in creating and improving industrial platforms for the effective transformation of their raw materials.

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Ultimately, a transition to higher value-added echelons of production will increase CCESAR’s terms of trade with the rest of the world and thereby lift many of its countries out of poverty.

Looking Ahead to New Models

Historically, efforts to increase the level of industrialization and economic integration within CCESAR have been marred by political ideologies that undermine efficient market dynamics. Import-Substitution Industrialization (ISI), the Mercosur Customs Union, and the Bolivarian Alliance for the Nations of the Americas (ALBA), are a few examples.

Therefore, if CCESAR countries want to advance economically and capitalize on the opportunities before them, they must abandon the anachronistic models that have dominated their agenda to date and embrace growth models that yield tangible, timely, and sustainable results. They should look to development models like those implemented by Singapore, South Korea, and Hong Kong.

Distance is the fixed variable in the gravity trade model. With respect to North America, CCESAR can use the distance variable to its advantage, vis-à-vis the rest of the world. Economic mass or GDP, on the other hand, is the factor that puts individual CCESAR countries at a disadvantage in that same respect. GDP in these territories, however, can be extraordinarily improved upon by means of integration, coordination and sophistication of the means of production, distribution, and exchange.

Improving the Value Chain and Unleashing its Potential

Currently, CCESAR’s aggregate GDP nearly doubles that of Japan. Yet, as mentioned earlier, the amount of goods it exports to the US is only 10% more than Japan’s. After plugging CCESAR’s economic and geographic data into the gravity model of trade and comparing the formula’s predictions to the region’s actual performance, one finds that current production capabilities are not being fully harnessed. Less so are the areas of potential growth being properly leveraged so as to drive them to maturity and profitability in a timely fashion.

In synthesis, CCESAR has a wealth of opportunities to surmount its current predicament of relative underperformance in the realm of exporting talent, goods, and services to North America. To effectively act upon them, CCESAR countries need not defy gravity. All to the contrary, they need to embrace it and use it intelligently to their benefit, not by leaping thoughtlessly into a void, but, rather, by intentionally originating the rivers of their economies in the high places wherein their respective comparative and competitive advantages are tapped into in an integral, sustainable, and comprehensive manner.

As they do this, CCESAR countries should, in the same breath, safeguard the operation of free market structures throughout the production process. All other things being equal, these structures will channel the flow of production throughout highly integrated value chains to ultimately commercialize and monetize the goods and services produced for the betterment of CCESAR’s sons and daughters that have suffered so much for so long. And, in many instances throughout history, unnecessarily so.

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