A shift in global geopolitics might mean a new direction for Latin American trade, with new influences, new alliances and new deals. Will 2018 be the year the region puts what have largely been complex, ineffective trading patterns behind it? Silvia Pavoni reports.

Latam's new trade

Earlier in 2018, in the space of less than two weeks, the tone was set for Latin America’s future trade policy.

On February 1, before embarking on a trip to the region, US secretary of state Rex Tillerson praised the 19th century Monroe Doctrine, under which Washington would not tolerate the geopolitical presence of any other global power in Latin America and which had been used to justify US military intervention south of its border. The comments were widely seen as directed at China and were badly received in Latin America.

Earlier, on January 24, US treasury secretary Steven Mnuchin ripped up decades of foreign exchange policy by welcoming a weaker dollar, thus reigniting fears of trade wars. Mexico is already having to cope with the US’s obsession with its trade deficit in the adversarial renegotiation of the North American Free Trade Agreement (Nafta) with the US and Canada.

Meanwhile, China’s foreign minister, Wang Yi, was addressing the ministerial meeting between China and the Community of Latin American and Caribbean States (Celac) Forum, in Santiago, Chile, expressing Beijing’s wish for greater co-operation with Latin America and praising the mutual respect displayed by all parties. China has surpassed the US as the main trade partner for Latam’s largest economy, Brazil, and is a key partner for others. It has been investing tens of billions of dollars in the region’s infrastructure (thus supporting trade) and is now offering the possibility of even larger deals through its $900bn One Belt One Road initiative.

These contrasting positions matter for Latin America’s intra-regional integration too. “The US is trying to reassert an influence it thinks it has had for the past few decades, whereas China is offering new investments and new trade relations,” says Ngaire Woods, founding dean of the Blavatnik School of Government and professor of global economic governance at Oxford University. The US approach betrays, she says, a unilateralist intent that has none of its former power. In fact, she adds, “[it] has created more openness and more space for Latin American countries to pursue co-operation among themselves and with other countries”.

Old ambition

Joining forces has long been a regional goal in Latin America. The World Bank’s vice-president for Latin America and the Caribbean, Jorge Familiar, traces it back to the early 1800s liberation from European rule. “At least since the time of [revolutionary leader] Simón Bolivar, we’ve been talking about regional integration,” he says. Yet, to date, despite numerous attempts and overlapping organisations geared towards this ambition, the region has made little progress.

Alongside the inefficient and undisciplined Mercosur – the customs union between Brazil, Argentina, Paraguay and Uruguay, which one professional says “only exists in the rhetoric of Itamaraty [Brazil’s foreign affairs ministry] and the foreign ministers of [the other members]” – there have been numerous initiatives since the 1960s to foster integration in a broader sense, with the Latin American Association for Integration (Aladi, by its Spanish acronym) being the most ambitious, aiming to provide a regulatory framework. 

With the exception of Mexico’s Nafta involvement, effective but northward-facing and now in dispute, the eventual four groups in which such efforts morphed into – the Andean Community, the Central American Common Market, the Caribbean Community and Mercosur – are generally perceived to have not grown to become effective region-wide initiatives or true free-trade areas. Indeed, the only true free-trade bloc within Latin America is the Pacific Alliance, set up much more recently, in 2012, by Chile, Peru, Colombia and Mexico, and open to countries outside the region.

Some crucial trade links are missing altogether. Mexico and Brazil, Latin America’s largest economies, have a trade agreement which covers only 15% of potentially tradable goods, according to the Inter-American Development Bank. Equally, Mexico lacks preferential trade status in its dealings with Argentina, Venezuela and Paraguay. There are similar limitations to the 44 bilateral exchanges between Central American and South American countries, and the 135 between Caribbean and Latin American countries. 

Wasting time

Free trade generally leads to greater volumes of trade. So far, intra-regional exports have not moved beyond 20% of the region’s total, compared with 60% for the EU and 50% for south-east Asia, according to the World Bank.

This is not purely due to a lack of policy: poor infrastructure and bureaucracy are widely blamed, too. For example, the average speed of trucks transporting goods across Central America is just 11 kilometres per hour, and the cost of transporting goods from the north-west of Argentina to the country's coast on the east is more than twice the cost of shipping them to Asia, according to the World Bank’s Mr Familiar.

Furthermore, according to the World Economic Forum (WEF), while Latin America performs better than the global average when it comes to domestic and foreign market access, it is held back by its transport connections as well as by inefficient borders. It takes 60 hours to deal with export documents in Colombia, but only six hours in Panama. It takes 120 hours to comply with border regulations and inspections in Paraguay and Uruguay, compared with the 16 hours it takes in the Dominican Republic. Chile has the best trade environment in Latin America in the WEF’s Enabling Trade index, ranked 21st out of 136 countries; Brazil, the region’s economic leader, is 110th, second to last in Latin America before Venezuela, which sits at the very bottom of the overall ranking.

Often, trade failure has been explained by the similarity of certain industries across the region, and on the threat a country’s specific, highly skilled sector may present to its regional counterparts. Brazil fears Mexico’s aggressive automotive sector and Mexico is uneasy about Brazil’s highly efficient agricultural businesses.

“You have a constraint on the political capital that Latin American administrations can spend to advance negotiations,” says Jaime Zabludovsky, president of Conmexico, the Mexican council on industry and consumer products. “In Mexico, agricultural businesses are reluctant to liberalise vis-à-vis Brazil. You have a window of opportunity to integrate Latin American trade, but you also have many vested interests to accommodate to find a package.”

A single road

The need to diversify trade partners – most obviously felt by Mexico with the Nafta renegotiations (about half of Mexico’s economy depends on the deal, according to analysts) – and to secure new free trade routes is felt across the region.

Political alignment over the benefits of open economies in Latin America is pushing the trade agenda, with pro-business leaders now in office in Brazil and Argentina, as well as in Mexico, Colombia and Peru, while Chile maintains its traditional open stance. This has created the environment for a convergence between Mercosur and the Pacific Alliance, a potential game-changer in regional trade. Official discussions between the countries involved began in 2014, and steps are being taken regarding the creation of regional value chains and the cumulation of rules of origin, among other elements.

Rules of origin are important. Should diagonal cumulation be allowed between countries of each group, it would mean that, for example, Colombian goods could be manufactured from Peruvian parts – both countries belonging to the Pacific Alliance – to export to Brazil, and still benefit from existing, bilateral preferential trade rules between Colombia and Brazil. 

“Right now, what happens is that there are 47 rules of origin. Each bilateral agreement has its own rules of origin, and most of them don’t allow for diagonal cumulation, so the goods have to use input [only from the country] that is part of the agreement,” says Mauricio Mesquita Moreira, principal economic adviser at the Inter-American Development Bank’s integration and trade sector division.

The region is building trade bridges that reach further, too. Mercosur is finally getting close to a deal with the EU after years of negotiations; Argentina and Chile signed the communiqué on international co-operation, including trade (although it is not a trade deal), with China and another 27 countries at the Belt and Road Initiative Forum in May 2018; and Chile, Mexico and Peru have joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the reincarnation of the Trans-Pacific Partnership that brings together 11 countries, from Canada to Vietnam and Japan, and allows free-trade access to a market worth $10,000bn.

Modernising trade is also key. The CPTPP includes digital trade, a new element for international deals which is also now being discussed under Nafta. Helpfully, this is something that is not proving contentious: Kenneth Smith Ramos, Mexico’s chief negotiator on Nafta, says that the digital trade component of a new potential agreement is almost completed.

The route to China

Of all the new trading partners to Latin America, China has become a key player. It is an important investor in the region: think tank Inter-American Dialogue estimates it has spent about $150bn through its policy banks since 2005, mostly in infrastructure and energy projects. Now it is offering the possibility of including Latin American countries in the One Belt One Road initiative. Panama is so far the only Latin American country to be listed among the 70 that have joined, and it did so after severing diplomatic relations with Taiwan, which China does not recognise as a separate state, and establishing new ones with Beijing. China is the second biggest user of the Panama Canal, after the US.

“China continues to call certain [Latin American] countries critical nodes, a ‘natural extension’ – that’s the language they use – of the [21st Maritime Silk Road, part of One Belt One Road],” says Margaret Myers, director of the Latin America and world programme at the Inter-American Dialogue. She notes how at the China-Celac meeting, earlier in 2018, China called Latin America an indispensable participant in the initiative but has not included it, formally, on the Belt and Road map, something she believes has been done intentionally to avoid provoking the US. But, she adds: “It doesn’t [quite] matter if Latin America is part of the initiative or not, because so much of this activity [infrastructure financing in particular] is already coming to the region.”

To maintain this trade momentum, political leaders in Latin America are under pressure to build a solid policy framework. Latin America’s convoluted trade links have often reflected the varied political stances of its leaders, and the volatile nature of politics within each country. Conmexico’s Mr Zabludovsky is blunt about it: “Latin America doesn’t exist as a region. You have countries that are very different among themselves and that can be different internally, compared with their previous selves, depending on the governments of the time. An Argentinian government under [Mauricio] Macri is very different from an Argentinian government under Cristina Fernández de Kirchner.”

Mr Zabludovsky uses the failed Trans-Pacific Partnership as a warning. The world’s most ambitious trade deal was not ratified on time under the previous US administration and is now moving ahead without the US. “[The US had] a window of opportunity to close TPP under [former US president Barack] Obama and that didn’t materialise,” he says.

Trade organisation Aladi’s secretary-general, Alejandro de la Peña Navarrete, also notes the sensitivity of trade integration, even among long-standing partners. “Any process of integration and regional integration is a complex one – you have the experience, there, of Europe and the UK,” he says. “[Similarly] in Latin America, we have ups and downs, and different factors that affect integration.”

A change of heart and of government might shake the new foundations of Latin American trade structure. Costa Rica, Paraguay, Colombia, Mexico and Brazil will all chose a new president in 2018; Venezuela has also called for a leadership vote, and, in Cuba, Raúl Castro is due to step down in April.

Political risk

In trade terms, populism and political risk are more evident in the region’s largest economies.

In Mexico, front-running leftist presidential candidate Andres Manuel Lopez Obrador has been touting a ‘Mexican people first’ slogan in response to US attacks on trade and immigration. While in Brazil, populist far-right presidential hopeful Jair Bolsonaro has called China “heartless” and questioned its access to Brazil’s industry.

Advancing with regional and international trade policies in Mexico and Brazil, in particular, is crucial, according to the Inter-American Development Bank’s Mr Mesquita Moreira. “If Brazil moves with Mexico, the whole thing can move: the convergence between agreements and even the idea of having a free-trade area for the whole region,” he says.

Chile’s minister of foreign affairs, Heraldo Munoz, is convinced that the region’s trade trajectory is irreversible. He notes how, for Mexico, the Pacific Alliance bloc and trade with Asia are important alternatives to a Nafta under threat, and that Brazil showed interest in a Mercosur convergence with the Pacific Alliance and a deal with the EU before the current pro-market administration of Michel Temer, under the leftist leadership of Dilma Rousseff. “The various electoral alternatives in the region will require more trade, more investment and more employment, for which trade agreements are hardly disposable,” he says.

A more open, better integrated Latin America is being built. This is largely thanks to new political thinking in the region and also to the world’s new geopolitical state. “Trade as something that [Latin American politicians] would have to spend capital on was certainly true when the trade equation simply meant the US,” says Ms Woods. “But I’m not so sure that once you start opening up trade relations with other parts of the world and with other countries in the region, that it takes the same amount of political capital.”

Meanwhile, the CPTPP, Mercosur’s EU deal, the One Belt One Road initiative and the convergence between Mercosur and the Pacific Alliance, as well as a new, modern Nafta, look set to continue to improve Latin America’s trade position and form the foundations of a solid and effective new trade structure.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter