Economic ties between Asia and Latin America are booming amid a sluggish world economy, but to unlock the full potential of this economic relationship, there must be more investment in connectivity, a removal of policy impediments, and more inter-regional engagement.
When European galleons set sail across the oceans nearly five centuries ago, they didn’t just find the New World, they found fertile ground for trade, setting an early pattern of exchange of Asia’s spice and Latin America’s silver.
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Just recently, direct trade ties between the two regions has grown at an astounding rate. From 2000 onwards, trade between Asia and Latin America has grown at an annual average of 20.5%, reaching an estimated $442bn in 2011. Today, Asia’s share of Latin American trade has soared to an unprecedented 21%, only behind the US’s share of 34%.
Plugging the trade gap
As the global financial crisis continues to affect the US economy and with eurozone economies struggling with sovereign debt and banking problems, further developing this 'south-south' trade is crucial to filling the growth gap. Expanding and deepening trade, investment and other relationships between the two regions will not only help keep economic growth firm in the immediate term, it can also secure the basis for sustainable growth over the longer term, promote a thriving middle class and reduce poverty in both regions.
Historically, Asia’s insatiable hunger for natural resources has paired well with Latin America’s rich wealth of commodities. Latin America exported its iron ore, copper, soy, oil, sugar, paper pulp and poultry in exchange for Asia’s multitude of manufactured goods, ranging from ships and cars to electronic equipment.
However, the time has come to reshape this trade relationship. By expanding and deepening the degree of economic and financial integration between Asia and Latin America, there is great potential for bigger mutual benefits. Certainly, more countries can be involved in this transregional relationship. Trade between the two regions has been concentrated among only a handful of countries. China, Japan, South Korea and India account for nearly 90% of Asia’s total trade with Latin America, half of which is carried out by China. In Latin America, Brazil, Mexico, Chile, and Argentina account for close to 80% of the region’s total trade with Asia.
A recent report from the Asian Development Bank, the Asian Development Bank Institute and the Inter-American Development Bank explored the trade relationship between the regions, noting that in order to deepen and grow the relationship, Asia and Latin America must lower trade costs, boost investment and explore non-market co-operation options.
The regions’ commodities-manufacturing exchange will likely continue to dominate and drive the relationship for the foreseeable future. The reason for this is that Asia’s strong industrial growth has driven demand for commodities such as minerals and energy and its rising income levels have lifted demand for imports of agricultural products. Latin America’s growing income has expanded demand for manufactured products which has been met by the supply capabilities of Asian manufacturing firms.
Extending the reach
It would be desirable to go beyond the commodities-manufacturing trade link, and to include more countries on both sides of the Pacific to take greater advantage of this developing relationship. To do so, both regions must take several important steps. Latin America must make significant investment in upgrading the quality of its supply side, including human capital, trade-related infrastructure and industrial technology. In addition to investments on these fronts, Asia should also invest more in physical infrastructure.
Governments must address high trade costs that still beset inter-regional trade and undercut opportunities for diversification and technological upgrade. Trade tariffs remain unduly high, and transport costs are driven upward by poor infrastructure and limited, inefficient transport services.
Average tariff barriers in mining, for example, are relatively low but are significantly higher in manufacturing (up to 16%) and higher still in agriculture (up to 55%). Non-tariff barriers also pose problems. In Asia, these are found predominantly in agriculture, while they are concentrated in manufacturing in Latin America.
Transport costs are relatively high, with freight rates typically ranging from 5% to 15% on Latin American imports from Asia, and jumping as high as 60% on Latin American exports to Asia. In many cases, this reflects weak connectivity through ports, roads, railways and other infrastructure in both parts of the world. There is also a lot of room to facilitate trade by reducing bureaucratic inefficiencies.
All of these factors result in lower trade volumes and higher prices for goods that are bought and sold between the two regions.
The foreign investment route
One way to deal with these problems is through unilateral actions taken at a national level, although a multilateral framework through the World Trade Organisation would be better. But with progress on the Doha Round stalled, free-trade agreements (FTAs) have been filling the gap. In the past eight years, 20 FTAs have been implemented between economies in the two regions, with two more signed, another eight under negotiation, and 11 more proposed.
To make the most of the agreements, both sides need to increase the depth and scope of the agreements, and include measures to promote investment, competition policy, government procurement, trade facilitation and intellectual property rights. These FTAs should also be better aligned with global and regional rules.
Foreign direct investment (FDI) can be a powerful tool for upgrading commercial relationships between Asia and Latin America. The two regions’ complementarity of resource endowments and large and dynamic domestic markets lend themselves well to FDI opportunities. The 'soft' infrastructure for FDI, including property rights, well-developed legal systems, good governance, streamlined immigration procedures for foreign workers and transparent rules governing capital flows is also an essential element for encouraging greater FDI.
Critically, national regulations and standards need to be conducive to greater private sector investment, particularly in higher value-added products, services, and technologies.
Making it easier for inter-regional financial flows would also support higher levels of investment. Portfolio flows and loans between Asia and Latin America make up a very small part of total financing in both regions. For example, Brazil is the most popular destination for Asian portfolio investment in Latin America, but Asia accounts for less than 8% of total foreign portfolio investment in Brazil, and almost all of that comes from Japan. Latin American portfolio investment in Asia is well below 1% of the total.
In some cases, FDI can support essential infrastructure investments to strengthen physical connectivity and accelerate trade within and across the regions. It may be worth considering developing institutions to tap Asia’s high level of savings to facilitate cross-border investment in Latin America’s infrastructure projects. The Asean Infrastructure Fund (Asean being the Association of South-east Asian Nations) could be a useful model for such an inter-regional body to channel funds to needed investments.
Co-operating approach
Finally, other channels of inter-regional engagement should be strengthened and broadened, including those for governments, regional arrangements and multilateral development banks. Greater steps can be taken to coordinate the voices of Asian and Latin American economies in international bodies such as the G-20, the International Monetary Fund, and the Financial Stability Board. The BRIC countries (Brazil, Russia, India and China) along with South Africa have joined together to speak with a common voice, but such groups could be made more inclusive. Similarly, information sharing between the two regions regarding financial safety nets, such as the Chiang Mai Initiative Multilateralisation in Asia, could also be useful to counter common threats to financial stability.
Trade and coordination between the two regions, while greatly beneficial for both, has the scope to increase further and indeed must rise if both Asia and Latin America are to ensure long-term prosperity for their people. To do that, Latin America and Asia must work together to put in place the right incentives, rules and institutions that will expand, deepen and rebalance trade and investment within and between their two regions.
In doing so, Asia and Latin America will find that the shipping lanes and other 21st-century connections between them become busier than ever.
Haruhiko Kuroda is the president of the Asian Development Bank, and Luis Alberto Moreno is the president of the Inter-American Development Bank.
