Why Latin America is the world’s trade pipsqueak

Latin America’s international trade, measured as exports plus imports as a share of GDP, has crept up over the past two decades, but it still trails most emerging markets. (Image: Pixabay)
Latin America’s international trade, measured as exports plus imports as a share of GDP, has crept up over the past two decades, but it still trails most emerging markets. (Image: Pixabay)

Summary

  • Its geography hinders commerce. But so does policy

Follow a lorry laden with Brazilian-made cars as it inches down the hairpin bends of the Paso Internacional Los Libertadores into Chile and the challenges of trade within Latin America become clear. Four times the lorry grinds to a halt as workers repair the road ahead; snow, ice and avalanches will soon smash it up again. The delays are so long that drivers hop out to smoke, staring up at the surrounding peaks. There is at least one crash a week, reckons a border official. This is the busiest trade crossing between Argentina and Chile, but treacherous ice means in winter it operates for just 12 hours a day. For about 40 days of the year, smothered in snow, it shuts altogether.

Latin America’s international trade, measured as exports plus imports as a share of GDP, has crept up over the past two decades, but it still trails most emerging markets. Strip out Mexico’s super-strength in manufacturing for export to the United States and the picture is even worse. In South America trade in goods is worth less than 30% of GDP. In other emerging markets it is worth around 50%.

Latin American countries are even worse at trading with each other. The region is far richer than sub-Saharan Africa, but intraregional trade accounts for a mere 7% of GDP in both places. Measured differently, only 14% of Latin America’s total goods trade occurs within the region, the lowest figure anywhere in the world (see chart 1).

(The Economist)
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(The Economist)

Low trade in general is a problem. Richer places tend to trade more and international trade has been a powerful engine of development everywhere from Europe to Asia. Whether low regional trade is a worry, however, is disputed. Beyond Mexico, Latin America’s trade growth in recent years has been based on surging Chinese demand for commodities like copper, soyabeans and lithium. Plenty of governments are still eager to focus on that opportunity, rather than on boosting trade with neighbours. But the strained relationship between the United States and China poses a risk. If tensions over Taiwan boil over, for instance, Latin America might struggle to maintain trade relationships with its two most important partners.

Some Latin Americans see an opportunity for nearshoring, the idea that multinational firms can expand production in the region so as to avoid exposure to China. Janet Yellen, the US treasury secretary, talks of “tremendous potential benefits". That is optimistic. There is little sign so far of a wave of foreign investment. Mexico aside, exports to the United States were flat last year. If nearshoring is under way, but not yet showing up in export statistics, you would expect to see increased foreign direct investment (FDI). That is not happening either. As a share of GDP, inward FDI is not perceptibly higher than the long-run average in most parts of Latin America. Compare that with South-East Asia, also seeking to benefit from firms fleeing China, where inward FDI is surging.

Boosting intraregional trade could cushion Latin American economies from slowing Chinese demand as well as superpower tensions. It could also help make Latin America more competitive globally. If parts and products could be made in the bits of the region where it is cheapest to do so, then traded, combined and sold, they would form so-called regional value chains, and boost exports. Why, then, are Latin American countries so bad at trading with each other?

Some reasons are structural. “We don’t trade with each other because we want to consume things that we do not produce," says Ricardo Hausmann of Harvard University. Low intraregional trade is, in part, due to a failure to make sophisticated products. Worse, Latin American countries often produce the same things: commodities (see chart 2). Chile’s biggest export is copper. So is Peru’s. Neither is ever going to sell much of it to the other. Geography matters too. South America covers almost 18m square kilometres, four times the size of the European Union. The world’s longest mountain range and its largest tropical forest make much of the continent impassable for all but condors and jaguars.

(The Economist)
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(The Economist)

These factors constrain the potential for intraregional trade, but only partially account for its paucity. The IMF reckons that Latin American goods trade is 40% lower than would be expected when comparing it with other parts of the world with similar economic and geographic challenges. The similarity of countries’ export baskets explains more of the difference, but exports can and do change over time.

Intraregional trade could improve if governments addressed the basics. Building better infrastructure would ease the headaches of geography. Argentina, for example, ranks 73rd on the World Bank’s logistics performance index, a measure of physical infrastructure quality and customs efficiency. The IMF estimates that reducing the gap between Latin American and rich-country infrastructure by half could lift exports by 30%.

Aconcagua Base

Every few years the notion of digging a vast, long tunnel through the Andes re-emerges. But that remains a pipe dream. Meanwhile truckers such as Ricardo Emmanuel, a 38-year-old from Mendoza in Argentina, continue hauling goods up and down dangerous, slow routes. “On that side it never gets repaired," he complains, gesturing down the road towards Argentina from atop the Paso Internacional Los Libertadores. He praises Chile’s sleek customs complex perched high in the Andes, but says the Argentines sometimes open just one of their many checkpoints, backing up lorries. Why? “They don’t want to work!" he shouts in frustration.

Better trade policy would also help. At first glance it looks good; nearly 90% of intraregional trade is already tariff-free. But those numbers flatter to deceive. There are two big problems. First, there is no proper preferential-trade agreement between Mexico, the region’s second-largest economy, and Brazil and Argentina, the largest and third-largest. Second, much of the free trade is based on a spaghetti bowl of bilateral agreements. That matters because most of those agreements push producers to use inputs almost exclusively from their home country, rather than from potentially cheaper third countries in the region. “This is a huge impediment to the creation of regional value chains," says Antoni Estevadeordal of Georgetown University. He reckons the rules are equivalent to an extra tariff of about 15%.

Some Latin American leaders simply do not want freer trade. Brazil and Argentina are the two most protectionist emerging markets in the world, says Marcel Vaillant of the University of the Republic in Uruguay. With a population of over 200m, Brazil is the continent’s largest market but protectionism means that for many firms in Latin America sales into the country are limited. Argentina currently levies a tax of 17.5% on purchases of foreign currency for most imports. And it directly taxes vast swathes of its exports. (Export taxes are also popular in Kazakhstan, but are seen as madness in rich countries.) Non-tariff barriers are rife across the region. Chilean producers of everything from avocados to salmon have to do separate food-safety processes for every market they export to. “That’s time and money," points out Ignacio Fernández Ruiz, the head of ProChile, the country’s export-promotion agency.

This protectionism has also scuppered high hopes for Mercosur, the customs union between Argentina, Brazil, Paraguay and Uruguay. Instead it both has high tariff walls to the world and is riddled with internal barriers. Mercosur briefly boosted trade between its members, but trade within the group is now no better than among other countries in the region. Trade between Mercosur and the rest of Latin America is miserably low.

Political volatility is another headache. The Pacific Alliance, a free-trade deal between Chile, Colombia, Mexico and Peru, was launched by four centre-right leaders in 2011. They hoped it would be a model for how regional integration could also boost global trade. But the election of leftist leaders in Colombia, Chile and Mexico sapped the organisation’s momentum. Mexico refused to pass the rotating leadership of the Alliance to President Dina Boluarte of Peru, claiming her appointment was illegitimate after she took over from her impeached predecessor. The Pacific Alliance is at its lowest point since it was founded, says Felipe Lopeandía, formerly Chile’s chief trade negotiator, now at Deloitte, a consulting firm.

Still, it is easier to fix these problems than to move the Andes. And even the two structural impediments to trade within Latin America—geography and the fact its countries produce similar goods—look different from the perspective of the part of global trade that is expanding fastest: services. The Amazon does not block Ecuadorian consulting firms from selling advice in Brazil. For Chilean mining-engineering firms, the fact that Peru also produces copper is a tremendous opportunity. Latin America’s intraregional services trade is still low, but the potential is obvious.

Chile’s service exports are also small, but last year they grew by 51%, mostly within Latin America. The potential for more excites Mr Fernández Ruiz, who has brought dozens of large firms from across Latin America to meet Chilean service providers. Not for the first time, the region might learn from pro-trade Chile.

© 2024, The Economist Newspaper Limited. All rights reserved. 

From The Economist, published under licence. The original content can be found on www.economist.com

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