Net Trade balance for commodities ( Emerging Asia, Latin America)
-- Asia and Latin America: the commodity market connection ---
Commodity prices fluctuate in response to changes in
demand, but to varying degrees. Oil prices are much more
responsive to a change in global output—about three times
more elastic than metal prices and nine times more than
slowdown in developing Asia would have less impact
on world metal and food prices than on oil prices, as the
region’s share of global metal and food imports is lower
than of oil (box figure). In 2011, developing Asia’s oil trade
deficit was 3.6% of GDP, three times the 1.2% deficit in
metals (the deficit in food is near zero). In addition, world
metal and food prices tend to be much less sensitive to
changes in demand.
The impact of lower commodity prices on growth in
Latin America is determined by two main factors: the
supply response of commodity sectors and a wealth effect
stemming from worse terms of trade. The supply response,
a decline in production, is larger for metals and food than
for oil, because metal and food occupy a larger share of
Latin America’s production and exports. The negative
wealth effect curbs consumption and tax revenues.
A global projection model is used to simulate the
overall impact a slowdown in developing Asia would have
on Latin America. The model includes three aggregate
commodities (oil, metals, and food) and seven country
blocks (the US, the euro area, Japan, emerging Asia,
the PRC, Latin America, and the rest of the world).
The emerging Asia block comprises Hong Kong, China;
India; Indonesia; the Republic of Korea; Malaysia; the
Philippines; Singapore; Taipei,China; and Thailand—with
the PRC as a separate block, the Asia-10.
To gauge the net impact a persistent slowdown in
Asia-10 would have on Latin America, a model scenario
is estimated assuming a series of negative shocks to
aggregate supply that lower the Asian economies’ potential
output growth by half a percentage point throughout the
simulation period. The drop in potential output growth
has a more pronounced impact on Asia-10’s actual
output growth—a 1.3% contraction in the first year—as
economies adjust to their lower potential output, with
negative spillovers to the other economies. Commodity
prices drop sharply in the immediate aftermath of the
shock, as short-term price elasticities are much greater
than long term. Lower commodity prices stimulate a
modest rebound in the Asia-10 economies that use those
commodities. This initial overshooting of commodity
prices leads to greater output volatility in the short run.
The output response of commodity-exporting Latin
America is quite different. The initial sharp drop in
commodity prices compounds the effect of lower output,
reducing growth in the region by 0.3% in the first year.
The subsequent recovery in commodity prices then
supports Latin American growth, offsetting the negative
effects from the trade channel caused by lower external
demand from Asia-10. Output in Latin America stabilizes
at a level 0.1% below its initial level by the 5th year.
The simulation results indicate that the overshooting
response of commodity prices drives the short-run output
dynamics. The initial sharp decline in commodity prices
partly offsets the decline in output in Asia-10 but actuates
through the trade channel the contraction in output in
Latin America. A decline in Asia’s growth sharply reduces
growth in Latin America in the short run, largely through
a steep drop in world commodity prices. The impact
is mitigated over time, however, as lower commodity
prices spur demand across regions and commodity prices
stabilize slightly below the initial level.
--- Sources: UN Comtrade database. Available http://comtrade.un.org; World
Development Indicators online database (accessed 11 February 2013).