Latin America: Time to build a bloc
02 Oct 2018
The region faces a new opportunity to strengthen trade
In the face of a rising US dollar and a global trend towards protectionism that affects some of the globe’s globe's major economic powers, the leading markets of Latin America find themselves with an opportunity to work on enhancing regional trade.
Some regional markets have done better than others in the mission to diversify economic activities and build value-added services to avoid an excessive dependence on commodities, but further intra-regional trade can help every economy increase sales volumes, find new niches and gain steady flows of income.
Let’s admit it: the dollar is strong, and the dynamic US economy promises to remain vibrant. The agenda of the US moves what happens in Latin America, and a strong dollar, among other factors, increases volatility in more exposed markets, with Argentina being the clearest example of that these days.
Shift to technology and knowledge-based industry
Oxford Business Group has been in Latin America long enough to recognise the complexity of a region where commodities play a crucial role. Several initiatives are being developed locally to build knowledge-based service economies – namely in Colombia, Peru and Argentina – and to enhance manufacturing processes through technology, as in the case of Mexico, where efforts to digitise the automotive sector are already having an impact.
Even smaller economies that have traditionally depended almost entirely on oil and gas are looking to expand investment opportunities beyond energy, such as Trinidad and Tobago which is focusing on ICT, agriculture and high-value manufacturing, among others, as new growth sectors.
Of course, hydrocarbons, mining and agriculture will remain the core of the region’s development, and help countries like Colombia regain economic dynamism. Indeed, these are sectors that will continue to require renewed investment, and legislative changes to that end, as in Peru, are encouraging that effort.
All said, diversification remains crucial to avoid excessive volatility and ensure stable revenues. And there, trade can be of much help.
The best medicine against protectionism
With the US looking very carefully at its borders, a boost on both bilateral agreements (the UK, for example, has shown strong interest in increasing trade with all its Latin America partners as it prepares for Brexit) and regional trade (Mercosur, Pacific Alliance and more widely the new TPP 11) will ensure that markets with strong commercial activity remain diversified and more stable, and of course, can look towards increasing trade volumes.
Diversification means safety
Too often politics changes – and changes again – the economic path of different markets. US President Donald Trump is indeed giving a new direction to the US, and we’re about to see what Andrés Manuel López Obrador (AMLO) does in Mexico, where he’s to take office in December. AMLO has so far closed the NAFTA renegotiation deal with the US, but his overall intentions to bring austerity to the public sector are muddied by inconsistencies, as they may imply the dissolution of agencies such as ProMéxico (which has done an excellent job in promoting the country and bringing in foreign direct investment) and raise concerns about the future of the energy sector, where public investments have been demanded in new refineries.
In Colombia the arrival of President Iván Duque Márquez could help boost a sleepy economy – the president has already put in place a reform to ensure higher transparency in Congress, and has listed among his priorities a plan for economic reactivation that eliminates red tape and promotes entrepreneurship. However, his plans have been criticised for not promoting a tax reform, which is much needed, according to many. All eyes are on Brazil next, with not a bit of unease.
Though changes in national administrations loom large at the country level, enhanced connections between the region’s economies offers the opportunity to zoom out, diluting the impact thanks to the larger scale of the market. This has the potential to help avoid dependency on decisions from new policy-makers, or make the most of upcoming changes that can benefit trade.
Regional trade makes sense
I was very happy to see the Pacific Alliance and Mercosur blocs approaching each other in July. Markets that now suffer from currency and inflation issues like Argentina understandably don’t like excessive exposure in the short term, but more partners will help avoid volatility in the longer term. We’ve recently seen Africa launching an ambitious project to develop its own Continental Free Trade Area. Isn’t it the time for Latin America to do the same?