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International business management

Can Latin America become an EU-like trading success?

Latin American countries such as Brazil, Argentina and Columbia are well known for exporting commodities such as coffee, soybeans and wine to the rest of the world.

However, these and other Latin American nations do a poor job of trading with each other, which experts say is stunting their long-term growth prospects and investment opportunities.

“Latin American countries have taken each other for granted. They focus so much effort on signing trade agreements with countries on the other side of the planet, while their neighbors import the same products from Asia that they are trying to sell to Asia. It’s a little tangled up,” says Kevin Gallagher, a Latin America trade expert at Boston University’s Frederick S. Pardee School of Global Studies.

Gallagher says difficult terrain, such as mountains and rainforests are part of what stunts Latin America intraregional trade, as well as a lack of leadership on building the appropriate infrastructure.

“You have to have the fundamental plumbing in place and that has really been neglected,” Gallagher says.

Latin America needs to invest 6.2 per cent of its gross domestic product (GDP) annually – or about $320 billion (U.S.) – to meet its economic goals to 2020, according to a report from the Economic Commission for Latin America and the Caribbean (ECLAC). The study says the average 2.7 per cent of GDP allotted to infrastructure over the last decade isn’t enough.

According to the ECLAC, “investment in infrastructure projects contributes to increasing the coverage and quality of public services … and reduces the costs associated with mobility and logistics, which in turn improves access to markets of goods, services, employment and financing, providing a favorable environment for improvements in the population’s overall well-being.”

LA bike and billboard
A motorcyclist rides past a billboard promoting the development and progress that the Interoceanic Highway will bring to the Madre de Dios region. REUTERS/MARIANA BAZO

Gallagher says there are some promising projects underway, such as the Chinese-backed Twin Ocean Railroad connecting Porto do Açu, a Brazilian Atlantic port, with Peru’s Puerto Ilo on the Pacific Ocean, but more needs to be done for the region to better compete globally.

Supply chain “gaps” threaten growth

The World Bank points to “serious gaps” in supply chain logistics, noting that both customs performance and the lack of infrastructure are hampering intraregional trade in Latin America – and the region’s long-term growth.

“Improving these aspects will entail more and better investment in infrastructure, as well as making the most of existing infrastructure by putting in place efficient trade facilitation measures and efficient and appropriate regulatory frameworks,” it states in the Latin American Economic Outlook 2014.

“Latin American economies continue to present relatively stable growth but continued uncertainty with regards to the duration of the commodity boom could pose threats to medium-term growth and economic development.”

The World Bank also cites increasing competition from emerging economies around the world, especially in manufacturing, as an economic threat. “In this context of shifting wealth, it is increasingly important to foster competitiveness and connectivity,” it states.

Latin America’s biggest manufacturing competitors are the United States and China, says Gallagher.

LA shipping
A shipping container with goods for import is unloaded from a truck on the docks at Brazil’s main ocean port, Santos. REUTERS/PAULO WHITAKER

He said Latin America has lagged in part because of a lack of innovation compared to many other nations. He cites World Bank figures showing innovation on average in Latin America is about 0.6 per cent of GDP versus more than two per cent in South Korea, 1.5 per cent in Malaysia and just over one per cent in China, which is considered large because it’s the second-largest economy.

“Those numbers reflect the mindset in the region that is distinctly different from Asia,” says Gallagher. “Asian countries put a lot of money into research and development, industrial parks, education … so they can feed off of each other. “

José Antonio Ocampo, a non-resident fellow for the Latin America Initiative at the Baker Institute and professor at Columbia University, says the intraregional trade is “very important” because it supports manufacturers in the region and helps to expand the domestic market.

“Most of the trade among Latin American countries is trade among manufacturers, which is different from exports to the rest of the world,” Ocampo says.

While there is a verbal commitment to increased integration among Latin American countries, Ocampo says there has been limited action to date.

He points to some success with the Pacific Alliance between Chile, Colombia, Mexico, Peru and more recently Costa Rica, with a goal of breaking down barriers between countries to build more economic integration. Each is also focussed on boosting exports to Asia.

Still, more strict trading nations such as Argentina and Brazil need to loosen policies to encourage more trade.

Number of exports from Argentina and Brazil

Exports have increased 400% to some regions since 2003

“The real issue is to not restrict trade … and to build better infrastructure for integration,” says Ocampo.

Trade has flat-lined

While other emerging countries such as China and India have boosted their intraregional trade, Latin America has remained relatively flat over the past 20 years, according to an analysis by Thomson Reuters.

“Latin America has been stuck in the old ways,” says Taneli Ruda, senior vice president and managing director of Global Trade Management at Thomson Reuters.

While there are a couple of exceptions, such as the Dominican Republic and Ecuador, Ruda says Latin America’s top 10 economies are as dependent on interregional trade today as they were back in 1995. He adds that the lack of intraregional trade has been “overshadowed” by outside trade, which can have a long-term negative affect on investment in the region if there’s no internal growth.

Free trade agreements are underutilized in Latin America

Ruda points to China’s growing appetite for commodities as an example of why the region’s outside trade has grown in recent years. Latin American nations also trade more with the U.S. than each other. Ruda notes that Latin America’s top five economies traded $662 billion (U.S.) of goods with the U.S. in 2012, compared to $247 billion within the region. This is due largely to Mexico’s inclusion in the North American Free Trade Agreement, and given that the U.S. is the world’s largest economy with a hunger for trade in general.

The emphasis means that mimicking the success of the European Union, which liberalized trade among its nations long ago with better infrastructure and dropped trade barriers, remains out of reach. Another example is the Association of Southeast Asian Nations (ASEAN), including 10 countries such as Indonesia, Malaysia, the Philippines and Singapore, which have developed trade agreements to create a stronger regional supply chain.

“As a result they’ve seen a lot of trade growth and with trade growth almost always comes rapid GDP growth. Latin America hasn’t done that,” says Ruda. “I think Latin America as a whole would benefit if it was more purposeful in incentivizing and developing intraregional trade. They are a natural trading block.”

Ruda argues Latin America needs to reduce trade barriers and rethink their free trade agreements to incentivize trading within the region.

“If you’re just trading agricultural produce, oil and minerals, you’re never going to evolve into a state with a lot of manufacturing operations to trade higher-value goods,” says Ruda.

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