Eliel Amaya
Senior Manager
PwC
/
Insight

Latin American Trade Issues Edge Nearer to Resolution

Mon, 09/01/2014 - 16:04

Although world trade has been increasing over the last decades, for Latin American countries this commercial development seems to have been moving in slow motion due to a number of factors holding back the sustainable development of trade in the region. Statistical data shows that most of the trade of Latin American countries is related to natural resources, including minerals and agricultural goods. Furthermore, the majority of such goods is shipped to China and Europe. Such a combination generates a high dependency on limited resources and highlights a lack of ability to diversify export markets. China’s trade with Latin American countries has grown tenfold over the last decade, as China has been shoring up a long-term source of commodities. The trade of goods like copper or mineral fuels is highly lucrative, but it does not help to enhance a sustainable trade by developing other industries. Brazil, Mexico, and Chile have a more complex combination of economic sectors, due to their manufacturing industries, but some of the key challenges to enhance trade are common to all of Latin America. Among the various factors to be considered are the slow economic growth of developed nations, a lack of legal certainty and adequate infrastructure, the high cost of financing, government bureaucracy, lack of appropriate investments, intellectual property rights (IPR) protection, local economic policies, and high cost for obtaining energy, among others. In order to overcome these restraints, a number of actions must be taken to increase investment and productivity.

Despite the great differences that exist between the economies of Latin America, the region has common aspects that need to be reinforced to provide economic stability and legal certainty to create confidence among investors. Nowadays, productivity and economic growth are limited, mainly because of insufficient and ineffective public investment. For example, a lack of investment in infrastructure has kept energy and logistical costs high, creating a negative factor for the revenues of any investor. Another example is the lack of proper investment in education in order to develop qualified personnel that may enroll in new industries. This should have been especially focused on creating an environment that enhances the manufacturing of added value goods, thus reducing the dependency on natural resources. The agenda for structural reforms should also include legal certainty for investors, including effective IPR protection, and better access to affordable financing mechanisms. Thus, political stability would lend a specific weight to investor’s decisions, while the national agenda would ideally include the continuity of government programs, investment, and taxes.

The most important challenge is to unify Latin America as an economic block in a way that will see the region able to face more important challenges in the worldwide context. Acting as a commercial block would also allow for the development of stronger national economies. As such, boosting trade within Latin America should include regional actions that allow countries to jointly face other commercial conglomerates. This should be implemented in opposition to prioritizing trade with another Latin America country presenting similar products for exports. This would reduce the need for international commerce, and no competitive advantage would be exploited. During the following years, the conformation of larger economic regions will be straightened by free trade agreements and the modification of bilateral agreements beyond their original scope, such as the Trans-Pacific Partnership and the Pacific Alliance.

Adjustments to existing agreements will have a bearing on the key players of the region. Such is the case of Brazil and Mexico. For example, the ACE 55 for the automotive sector between both countries was adjusted after a sudden imposition of import quotas in Brazil for Mexican vehicles in 2012. Such quotas were imposed after Brazil saw its trade deficit with Mexico increase, due to a growth of Mexican exports exceeding 40% in 2011. A similar situation resulted in the agreement between Argentina and Mexico, once again due to escalation in the commercial deficit because of an increase in Mexican vehicle export. The result, besides commercial limitations being imposed from 2012 to 2014, was a change in the investment flow. Automakers as Mazda modified their expansion plans in Mexico, cancelling exports to Brazil and increasing their current capacity directly in that country. Others adopted another approach, investing in a joint venture production to increase their offer in the Brazilian market, as was the case of Toyota.

International commerce represents an opportunity when countries with different economic profiles combine. In the case of Latin America, too many similarities between countries’ trade portfolios lead to fewer opportunities. One long-discussed way of resolving this would be to create more partnerships with the US, as the largest economy in the hemisphere. The ensuing economic gains for any Latin American country would allow it to attract investment and secure a broader and steadier export market. For many Latin American countries, this would also be an opportunity to expand arrangements such as the Caribbean Basin Initiative (CBI), the Generalized System of Preferences (GSP), or the Andean Trade Preference Act (ATPA).