With advanced economies still languishing in the doldrums, trade between Asia and Latin America is driving global economic growth, and it appears that this blossoming relationship is mutually beneficial. However, could protectionist policies in Latin America dampen this ardour?

Trade relations between emerging markets have been strengthening, despite lower economic growth rates in some of their leading representatives. And the longer it takes the eurozone to stabilise and the US to regain competitiveness, the stronger south-south ties will become.

Emerging markets have accounted for 50% of the world’s economic growth every year since 2007 and that proportion will increase to 75% over the next few years, according to HSBC. It is therefore only natural that trade between such markets will intensify.

Here to stay

“Trade [between Latin America and] Asia, especially China, is here to stay,” says Ilan Goldfajn, chief economist at Itaú Unibanco, speaking to The Banker at this year’s International Monetary Fund-World Bank annual meeting in Tokyo.

“[China's economy] may not grow by 10% or 11%, but maybe 7% or 7.5%. This means that it will [continue to] demand a lot of commodities, a lot of input in its productions. And a market for Asia’s products will increasingly be Latin America as Europe and the US will grow less than in the past 10 years,” he adds.

Fred Neumann, co-head of Asian economic research at HSBC, agrees: “We don’t see advanced economies coming back so quickly, so it’s the south-south trade that is really the driving force behind [global economic growth].

“[In Asia, trade with Latin America] and with the Middle East is important. Part of this is because of natural resources but there are other reasons as well, [such as] manufactured goods being traded across these regions. We think that this will be one of the engines of growth in the world.” 

Export importance

Historically, Asia’s hunger for natural resources has paired well with Latin America’s rich wealth of commodities. Of all of the Asian economies, China has been the hungriest. According to Bank of America-Merrill Lynch, exports from Latin America to China went from $18bn in 2005 to $97bn in 2011. China accounted for 11.7% of total Latin America exports last year, compared with 5% in 2005. Brazil, Peru and Chile now count China as their single biggest export market. Last year, Brazil sent 17.3% of its exports there. By contrast, Mexico and Colombia, whose biggest trading partner is the US, sent only 1.7% and 3.5% of their exports to China.

We don’t see advanced economies coming back so quickly, so it’s the south-south trade that is really the driving force behind [global economic growth]

Fred Neumann

Peru and Chile’s exports to China were even higher than Brazil’s in 2011 at 18.4% and 22.8%, respectively. But, in absolute terms, Brazil is the largest exporter to China, which has also become its second largest source of imports for the past three years. Brazil continues to be China’s ninth largest trading partner in the world and a larger trading partner than fellow 'BRICs' Russia and India.

Last year, trade in goods between the two countries reached $84.2bn. Brazil’s exports to China were $52.4bn, while imports were $31.8bn, an increase of 37% and 30%, respectively, compared with 2010. Despite China’s economic slowdown, its importance to Brazil and the rest of Latin America is undiminished.

These figures go a long way to explaining the move of Chinese banks into Brazil and vice versa, as they follow clients’ international trades. China’s largest bank, Industrial and Commercial Bank of China (ICBC), has set up operations in Brazil, as well as Argentina and Peru. Zhao Guicai, head of ICBC’s Brazil business, highlights the importance of the country to his bank and points out that before it established a presence in Latin America, ICBC has had correspondent banking relations with more than 20 local lenders in the region. “This helps to provide more comprehensive financial services to enterprises of both countries so that they can expand their business in China and Latin America,” says Mr Guicai.

Following the trade flow in the other direction, Citi’s Latin American business, which has had a long presence in the region, has set up a desk in Shanghai to support its Latin American clients in their trade with China. The desk offers advisory services on market practices, but also helps with funding issues, leveraging the bank’s correspondent banking network.

Entering a foreign market may not seem quite as challenging for big banks and international players, but as HSBC’s Mr Neumann points out: “It is not only about the big international banks, it is also about local banks building a presence, getting into trade finance and other business areas.”

Co-operative approach

Indeed, it is not only trade financiers that are strengthening their ties across emerging markets. Brazil’s relatively small investment bank BTG Pactual has partnered with China’s Citic Securities and Russia’s VTB Capital to generate business across all three countries. This also helps overcome cultural and relationship issues in different continents.

Brazil [has] seen most foreign banks enter the market. Spanish banks are having some problems in Spain now, but are [doing] good business in Brazil. And now we’re seeing some Asian banks [arriving]

Ilan Goldfajn

“The idea behind this kind of co-operation is to get the most synergies from those banks. They have the relationship and the culture; communication gets much clearer,” says BTG Pactual’s head of investment banking, Guilherme Paes. “We have some people in Hong Kong, but it is not going to be easy to have the kind of relationship that a Chinese investment bank has in the country. And if a Chinese bank wants to establish itself in Brazil, it will never have the same relationship we have,” he adds.

Mr Guicai shares these views. He points to the role that ICBC played in the record $70bn equity offering by Brazil’s state-run oil giant Petrobras in 2010, where the bank was the only Asian mandated joint bookrunner. “ICBC completed a total of $1.2bn in stock sales. Besides raising money from the Asian market, ICBC helped Petrobras establish a good image and reputation in Asia,” says Mr Guicai. ICBC’s participation in the deal also highlighted the strong pre-existing relations between China and Brazil, which guaranteed oil supply in exchange for $10bn-worth of bank loans the year before the equity deal was struck.

Looking ahead, it is only natural to wonder whether competition for local clients will be affected, with more Chinese banks and lenders from other emerging markets following their corporate clients to set up camp in Latin America. Most bankers, however, are not concerned with this prospect. “The way I look at it, they have the same approach as Brazilian banks following their clients; they follow their corporates, they come to Latin America trying to be a partner,” says Itaú Unibanco’s Mr Goldfajn.

“Brazil [has] seen most foreign banks enter the market. Spanish banks are having some problems in Spain now, but are [doing] good business in Brazil. We have all the American banks, investment banks, commercial banks; some leave, some come back. And now we’re seeing some Asian banks [arriving],” he adds.

Protectionist fears

If Brazil’s banking sector has been open to foreign players – although it continues to be dominated by large domestic groups – the country has been labelled as protectionist following some measures adopted by its government to restrain the inflow of short-term capital to Brazil and protect its manufacturing sector.

Tendencies to protectionism have indeed divided Latin America into two groups: the more obviously open-market countries, led by Mexico, Colombia and Chile, and the those that are more closed to foreign investors, such as Venezuela, Argentina and, increasingly, Brazil.

[Latin America] enjoys an enviable geographical location vis-à-vis Asia and Africa, with proximity to the US and European markets, but it lags behind Asia in infrastructure

Juan Carlos Echeverry

In a recent interview with The Banker, Mexico’s central bank governor Agustín Carstens pointed to his country’s very open trade regime as a recipe for its success and accepted that governments in Argentina and Brazil have taken a very different stance. Further, Colombia’s former finance minister, Juan Carlos Echeverry, says that Brazilian restrictions to trade can be an obstacle to faster growth.

The protectionist tag, however, is something that the Brazilian government strongly rejects. In a speech in London earlier this year, finance minister Guido Mantega showed statistics indicating that 11 of the world's largest countries have a stronger protectionist environment than Brazil. The ministry’s data pinpointed the number of protectionist measures, net of liberalising ones. The group was led by Argentina, with a net balance of 165 protectionist initiatives, followed by the US with 129 and Russia with 124. Brazil had 97 protectionist measures and 70 liberalising ones, giving the country a net total of 27. Mexico’s and Chile’s net totals were 11 and three, respectively.

Need to diversify

The main challenge to freer trade flows, however, is to be found elsewhere. As China’s economy slows, a higher degree of sophistication in the products and services it exports will be needed to support trade flows and diversify revenue sources. Latin America will need to go beyond its mining and agribusiness exports, which currently represent the majority of its international trade, as demand for commodities may not meet the region’s export targets in the future. Long-term investments to develop the manufacturing and processing sectors will be needed, whether from within countries or through foreign investments.

“The key, as has happened in Asia during the past 40 years, is attracting the right type of investment,” says Mr Echeverry. This is something that Luis Alberto Moreno, president of the Inter-American Development Bank, knows well. He shared his views on the subject in a recent opinion piece for The Banker, co-authored by Haruhiko Kuroda, president of the Asian Development Bank. The article highlights the need “to go beyond the commodities-manufacturing trade link, and to include more countries on both sides of the Pacific to take greater advantage of [the south-south trade] developing relationship”.

Greater investments in infrastructure are also needed. Currently, Latin America’s narrow-reaching and dated transport network is a significant obstacle to the development of intra-regional and international trade, especially for smaller economies.

“[Latin America] enjoys an enviable geographical location vis-à-vis Asia and Africa, with proximity to the US and European markets, but it lags behind Asia in infrastructure, a fact widely recognised in Brazil, Colombia and Peru, among others,” says Mr Echeverry. “Intra-American trade has grown, but the paramount geographical [challenges] – the Andes, the Amazon and the intractable Darién strait between Colombia and Panama – impede faster trade growth.

“Latin America has enormous potential in transforming its commodities and adding more value, which will require higher standards of quality, better logistics and the inflow of capital and know-how from worldwide players. The main issues are ambitious infrastructure [projects] interconnecting these economies and the lifting of trade barriers. There will be substantial improvement in the years ahead.”

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