The importance of border trade: The case of Bolivia

Our main purpose in this paper is to present the state of the Bolivian economic relations with her close neighbors, given the trend in the region toward economic integration. Distinct features of the paper are the special attention given to location, the role of physical infrastructure, transportation costs, and, to a lesser extent, economies of scale. When we begun writing the paper, we started with a main focus on border trade in a narrow sense. We soon realized that, given the current liberalization trend, border trade must evolve into economic integrated regions, i.e., regions that cross natural boundaries, but with the important proviso that localization is a central characteristic. Thus, we have devoted much space to explore the scope of border trade extending itself spatially. International trade theory relies in country differences in factor endowments and efficiency as determinants of trade. In this paper the approach is more empirical, giving a large weight to geographic elements and transportation costs. Border trade and trade in close vicinities, often exhibiting low transportation and communication costs, provide extreme examples of "natural" trading blocks and integration. Regional agreements of economic integration frequently require detailed policies and provisions on factor mobility. Neither of these considerations seem important in border trade, given that policy coordination is frequently irrelevant to the specific towns of contact and labor mobility is somewhat automatic. Bolivia has a singular geographic position in South America, flanked by five countries, Argentina, Brazil, Peru, Chile and Paraguay. This feature should give to Bolivia's trade distinct advantages. This has not been so, partly because of her landlocked situation, rugged topography and generally poor transportation infrastructure.

Bolivia's traditional exports have been mainly of high value raw materials, like tin and silver, and of natural gas. Recently, non-traditional exports (that in Bolivia is everything that is not minerals or natural gas) have taken a momentum. These exports are directed, to a significant extent, to our neighbors. As important, the neighbor countries are the most important source of Bolivia's imports. Contrary to what happens in most Latin American countries, for Bolivia the neighbors are among her more important trade partners. A significant share of the trade with our neighbors is deemed to be border trade, although numbers are hard to come by. Difficult internal transportation and communications underscore the importance of border trade for Bolivia. A recurrent question in the paper is the extent to which some features of border trade can be spread to increasingly larger zones. There is also the related question whether the economic integrated zones should be just extensions of border trade or should they have their distinct characteristics, many of them resulting from bilateral negotiations. The paper is organized as follows. In Section I we describe the Bolivian trade in the regional context, including some numbers that illustrate the direction of the trade flows. In the same section we survey Bolivia's regional integration agreements, limiting ourselves in the discussion to the arrangements with our close neighbors. In section II we look at some specificities of border relations in the general framework of international trade. Also, we report there Bolivia's main border points and the characteristics of their trade. In section III we explore the implications of enlarging the border trade and constituting economic integrated zones. In section IV we conclude.