Politics, Business & Culture in the Americas

Ask the Experts: Trade is Back!

How can Latin American economies better engage global trade partners as they recover from the end of the commodities boom?

Antoni Estevadeordal answers:

The June 2015 summit of the Community of Latin American and Caribbean States (CELAC) and the European Union (EU) made clear that countries on both sides of the Atlantic are thinking of ways to revamp their increasingly stagnant political and economic ties. While Latin American and Caribbean (LAC) exports to the EU nearly tripled in value from roughly $44 billion in 2003 to almost $120 billion in 2013, the region still accounts for only 11 percent of total LAC exports—a figure that has barely changed over the past decade.

Yet changes currently under way in LAC and Europe should favor closer cooperation between the two regions. As the supercycle of high commodity prices and large revenue flows comes to an end, deepening intraregional integration—through the convergence of existing integration schemes and by closer cooperation to improve physical infrastructure and facilitate trade—can make a significant difference.

Projects like the Initiative for the Integration of Regional Infrastructure in South America (IIRSA) and the Mesoamerican Pacific Corridor are good examples of this trend. IIRSA is working to integrate the region by connecting national electricity grids, and by improving and expanding national transportation routes and connecting them to major trade hubs. Another important regional initiative, the Mesoamerican Pacific Corridor, aims to create a logistics corridor from Mexico to Panama through a renovated highway network, upgrades to border crossings and improved customs procedures. These initiatives will allow LAC to improve its competitiveness abroad and engage more in global trade.

LAC’s emerging network of bilateral agreements also offers a promising avenue for engaging European trade partners. In recent years, the EU has signed agreements with Chile, Central America, Colombia, Mexico, and Peru. Such agreements will likely bring new market opportunities to both regions. Additionally, nine EU countries have become observers to the Pacific Alliance, an integration initiative that is consolidating existing agreements and creating a platform to expand market access abroad. Reaching across the Atlantic is as important for the EU as it is for LAC, given that many European countries need new channels through which to stimulate growth as they recover from the global financial crisis. The Pacific Alliance is a worthy partner: member countries have outperformed other economies in the region—averaging an annual gdp growth rate of 4.5 percent between 2004 and 2014, compared to the rest of LAC, which grew at 3.7 percent a year—and have favorable business environments.

Mercosur, which is in the midst of negotiating a free trade agreement with the EU, holds additional promise. The EU is Mercosur’s largest trade partner, accounting for almost 20 percent of its exports. EU exports to Mercosur alone have increased fourfold in the past decade, and the group is now the sixth largest destination for EU exports. Crafting rules that provide preferential access to each other’s markets would be a boon to interregional trade. What’s more, an agreement would indicate that Mercosur is serious about expanding extraregional trade ties, which could in turn encourage regional partners to follow suit.

Endnotes

Shihoko Goto answers:

Copper and gold prices may not return to their recent dizzying heights any time soon, but demand for commodities in resource-poor nations across Asia shows no sign of abating. The need for the natural resources that Latin American nations have to offer is stronger than ever, and Japan is no exception. The question is less about what Latin America can offer East Asia, but rather how the relationship between Tokyo and Latin American nations can go beyond just meeting economic needs, and lead to stronger relations—and above all, trust—in the longer term.

Last summer, Shinzo Abe became the first Japanese prime minister in a decade to visit Brazil, Chile, Colombia, and Mexico. As the competition among Japan, South Korea and China to secure closer relations with the region intensifies, Abe was hoping to boost not only economic, but also political and social ties. Japan already has a free-trade agreement with Mexico, and its investment in the Mexican auto industry has contributed to the surge in Mexican car exports. If the Trans-Pacific Partnership (TPP) free-trade deal is concluded in the near future, not only will Tokyo’s relations with Mexico be further strengthened through lower tariffs and higher investment standards, but there will also be greater trade flows with the region’s two other potential TPP member countries, Chile and Peru. Japan is also the first Asian country to become an official observer of the Pacific Alliance, which offers an additional tool for strengthening its trade presence.

As the Abe visit makes clear, looking at relations between Japan and Latin America solely through an economic lens would be shortsighted. Japan has deep demographic and cultural connections to the region—particularly in Brazil, Peru and Argentina—that have been fostered by successive waves of immigration in the late nineteenth and twentieth centuries. Moreover, as the Japanese population continues to age while the birthrate remains low, the need for migrant workers with Japanese-language skills and a familiarity with Japanese culture will be increasingly felt by a graying society.

A worker exchange between the two regions could help Japan deal with its aging population and could offer many Latin Americans a valuable opportunity for financial gain. However, similar initiatives have not always worked well, most notably during the economic boom years of the 1990s. At that time, thousands of work permits were issued to Peruvians and Brazilians of Japanese descent to make up for the labor shortfall in Japan. As jobs dried up, the nearly 400,000 migrants were asked to return to their country of origin, with the Japanese government paying their return flight home and a stipend of $2,000 per person. The move was seen as particularly callous to those who had hoped to be able to call Japan home. But as Japan’s demographic bind becomes increasingly acute, the country will undoubtedly be pushed to revisit its policy of integrating migrant workers into the country’s fabric.

The allure of Latin America for Japan—and Asia at large—will only increase in the years ahead. For Latin America, the challenge will be to partner with countries that will be eager to invest in local communities and boost technological transfers, as well as to encourage capacity-building that can lead to longer-term growth. Japan’s track record in the region bodes well in assuring Latin American nations that it can meet the region’s future needs.

John Manley answers:

The commodities supercycle is now over. In the past decade, countries throughout the world could supply any manner of basic foodstuffs and natural resources to a rapidly growing Asia and achieve swift economic growth. With China now slowing, commodity-producing countries, from Canada and Australia to Brazil and Peru, are being forced to re-evaluate their economic strategies. In the next decade, growth will come from the creation of innovative products and services, and the development of robust channels through which to sell them to the world.

Latin America enters this post-supercycle era as a region divided. One group of countries, consisting of the Pacific Alliance (Mexico, Colombia, Peru, and Chile), Costa Rica, and Panama, are the globalizers. They have generally sought out connections with global supply chains and world markets over the past two decades and have targeted their economic strategies to enhance their participation within them. This positions them well to transition to a higher value-added era.

The other group of countries, comprising Brazil, Argentina, Ecuador, and Venezuela, are the nationalists. While there are vast differences between the sophisticated institutions of Brazil and the chaos of Venezuela, their economic strategies are on the same continuum. In their view, the state—rather than the market—has a central role to play in national development. Not surprisingly, these countries have few trade agreements with partners beyond their immediate neighborhood. Brazil, for example, has been “exploring” a free trade agreement with Europe for 15 years and played a central role in killing the Free Trade Area of the Americas a decade ago. In the years since, the nations in this group have shown limited interest in developing robust trade linkages with North America.

Go-forward strategies for these two sets of countries, therefore, need to be differentiated. The globalizers need to focus on two main challenges. In the first instance, how to grow more multilatinas: largescale, technologically sophisticated, internationally active firms. In the second instance, how to spread the benefits of global connectivity to the bottom 50 percent of the population, especially by leveraging information technology and express shipments as channels of global trade, while improving education and training—the building blocks of innovation and competitiveness.

For the nationalists, the challenges are more basic, such as the need to enhance their connectivity to global markets and to simplify outdated tax and regulatory measures. More broadly, their growth prospects are being dragged down by poor governance and regulatory excess. Investors have little confidence that public institutions will uphold their property rights or ensure fair treatment. Turning the page on past bad experiences can only be remedied by consistent, even-handed treatment over time, starting now.

Many of the Canadian CEOs I represent have sizeable investments in Latin America. These are increasingly focused on the globalizer countries. Their message is clear: growth comes from global connectivity, strong human capital and good governance. The alternative is stagnation.

Ann Lee answers:

In order to return to the high growth rates Latin America experienced during the commodities boom of the 2000s, the region must exploit its competitive advantages in the world economy. As the global demand for certain commodities falls, Latin Americans should focus on the factors that will tip the scale for trading partners to do business with them, instead of with others.

One of those factors is reducing harmful regulation. Trade partners look for tax advantages and ease of doing business without onerous red tape. The Chinese, for example, would prefer that Latin American countries ease or remove the infant industry protections that have made it difficult for Chinese companies to set up operations and thus hire Latin American workers. Introducing competition into Latin American countries would also have the added benefit of pushing domestic companies to invest more in their own operations to increase competitiveness, and thus become more reliable supply chain partners to China.

Trade partners, including the Chinese, also want to be able to hire workers who are skilled and inexpensive. Part of making a workforce attractive to foreign firms involves skill diversification. One complaint I’ve heard from the Chinese is that Latin America has too many lawyers and not enough engineers. Without enough engineers and other workers with technical expertise, it would be difficult for the Chinese to hire enough Latin American workers to have a positive impact on unemployment. Additionally, skills diversification includes the promotion of multilingualism. The reality of today’s global economy demands a workforce that speaks English and/or Chinese, and Latin American countries will be better positioned to compete if their populations can do so.

Latin American countries attempting to make the suggested changes will most certainly face resistance from those who do not want increased competition and economic dynamism. Since such political opposition can take many years to overcome, the region can more immediately jumpstart its economies by capitalizing more on its existing strengths. One example would be to increase tourism to Latin America, particularly from China, to help its conservation efforts. Latin America is rich in natural beauty and should work to preserve it. The region should also strive to become a preferred vacation destination for China’s growing middleclass populations, who currently spend more tourism dollars in the U.S. and Europe. Attracting a bigger market share of Chinese tourism dollars would go a long way in helping Latin America increase conservation funds to preserve its environment.

Latin America can also capitalize on China’s historic and cultural preference for alternative medicine. For example, the trade in exotic fruits, bark and other indigenous flora necessary for alternative medicine can find an extraordinarily large consumer base in China because big pharma does not yet control China’s health care market. Furthermore, Latin America’s exotic plants can prove beneficial for biotechnology research, creating additional revenue and jobs as well.

If Latin Americans can incorporate some or all of these suggestions, then the region will be able to successfully pivot from being merely another commodities producer to one that can embark on a new renaissance of high economic growth while simultaneously showcasing its unique beauty, talent and cultures not just to China, but to the world.

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