Nearshoring and Intra-regional trade in CARICOM - by Shineco Sutherland

 

Nearshoring. That old concept which has attracted renewed focus and attention. In the present Covid-19 ravaged global economy, there is renewed discussions on this concept -  particularly for strategic industries such as food and medicine.  Given this, what exactly does the concept mean? What are its implications? What is the Caribbean context in this conversation? Stick around if you are interested in my responses to these questions.

Nearshoring is where a country's imports or a company's purchases are sourced from geographically-closer suppliers. For example, if the Caribbean changes its supplier for medical equipment from those in the US to those in Barbados, it has engaged in nearshoring. The implications of this can include first, lower probabilities of disruption to supply chains. This is because shorter geographical distances generates lower possibilities of unexpected developments and a less complex transportation route. Second, changes in purchasing price. If the new suppliers do not have access to the economies of scale of the previous supplier, the cost of the items may be higher. The opposite will be true. The final costs  will however depend on  insurance, shipping, etc which may now be lower because of the shorter geographical distance. Third, the financial resources used for purchasing will be redirected. From the example above, Caribbean spending will be redirected to Barbados instead of the US. This will then have the spill-off effect of increased demand for Bajan production, creation of new employment in Barbados, higher incomes or revenues which can be recirculated into the region. However, these possibilities can only be realised if nearshoring is undergirded by the relevant infrastructure and processes.

These outcomes will require Barbados to have the capacity to produce the medical goods; the transportation sector of the region to be reliable and affordable; the trained human resources are available to provide needed expertise; legislation is updated and innovative; etc. Assume that such supporting infrastructure is in place, and for good measure lets also assume that CARICOM has ironed out its "implementation deficit" and there is also genuine regional commitment to this new agenda. Such will likely be a positive development for intra-regional trade because the 2019 context can be described as:

1. CARICOM imported merchandise valued more than US$29 billion while exporting only US$16 billion in value
2. CARICOM has a persistent trade deficit in merchandise trade 
3. Intra-regional trade continues to be low and accounts for only 11.59% of the region's total exports and only 8.28% of total imports                       

One can also add that, counter-intuitively, despite having an active agricultural sector, CARICOM still has a high propensity to import food from extra-regional sources. Initiatives such as the "25 in 5" will attempt to address this issue. It intends to reduce the food import bill by 25% in the next 5 years. That aside, the economic outlook also adds another layer of consideration for the importance of intra-regional trade.  Below are excerpts from economic outlook for some of the region's economies for 2020:

• The Barbados Central Bank noted its third consecutive double-digit quarterly decline in economic output as at September 2020, largely attributed to the poor performance of the tourism sector. Additionally, over the same period, the government relied heavily on the external markets to fill its financing/revenue gaps. 

• The Jamaican National Bank noted a 14 - 17 percent decline in the Jamaican Economy over the period January to June, 2020, within a context of declining net exports, investment and private consumption. All sectors have registered downward trends up to June, 2020

• As at March 2020 the Bank of Guyana recorded mixed fortunes for its economy which was beginning to feel the effects of the flagging global economy, especially the newly discovered oil that was expected to significantly enhance economic activities in 2020.

• The Central Bank of Trinidad noted economic contractions up to June 2020, including in its oil and natural gas sector.  

• The Eastern Caribbean Central Bank forecasted a 10 - 20 percent contraction in the economies of the ECCU for 2020. This forcast was prior to the deep impacts of Covid-19 and is likely to be significantly higher. 

All of these negative outlooks were connected to the depressed global economic downturn which lead to a reduction in remittances; a reduction in tourists and tourism-related businesses; reduction in foreign direct investment; etc. As the global prospect worsens, this is an opportune time for regional partners to increase trade amongst themselves, generating additional motivation for intra-regiona trade. In the absence of robust intra-regional trade, CARICOM deprives itself of  the potential to leverage the regional networks to boost a flagging tourism industry, to support food security policies, to fill the gaps in pharmaceutical demand or to recirculate financial resources to arrest the region's economic downturn. 

While intra-regional trade and nearshoring will not inoculate the region from all of the negative impacts of a global economic, it holds the potential to buttress the region's Covid-19 mitigation strategies.