Latin America

Latin America turns a protectionist crisis into an opportunity

Latin America’s timing has never been good.

Ask Maurico Macri, whose efforts to end 14 years of isolationism by preaching free trade have run up against a global wave of populists promoting protectionism.

Donald Trump’s trade dispute with China is the most visible sign of that protectionism – but it is also on the rise in Europe.

This helps to explain why global trade is dipping: the World Trade Organization (WTO) says tensions will slow the growth of world merchandise trade volume to 3.7% in 2019 from 3.9% last year.

China has just reported that exports plunged by 20% in dollar terms year-on-year in February – days after curbing its 2019 growth target to the lowest level for 30 years.

For emerging regions like Latin America, the implications are obvious.

Although exports from the region hit their highest level in six years with a 9.9% increase in 2018, growth is slowing.

Trump and trade

Many economists blame declining trade on Trump, who has used the pretext of national security to justify tariffs on imports.

Retaliation is escalating this problem.

The wider fear, especially in the European Union (EU), is that the US president is gunning for the WTO in order to scrap the rules of global trade.

Concentrating solely on Trump may be unrealistic – protectionism predates this maverick, and the whole world has been at it.

In late 2017, research indicated that the world’s top 60 economies had adopted more than 7,000 protectionist measures since the 2007–08 financial crisis.  

But the consensus of multilateral institutions such as the IMF and World Bank – while couched in diplomatic terms – is that Trump is the villain in this story.

The IMF has warned rising trade tensions between the US and the rest of the world could cost the global economy $430bn, and the World Bank says they could hit trade as badly as the 2008 financial crisis.

Impact on Latin America

So how does this affect Latin America?

The Inter-American Development Bank (IDB) is monitoring trade talks between the US and China closely.

Despite rising hopes of a deal, the mood music has again turned discordant.

The IDB believes that no agreement – and hence the effect of a 25% US tariff on about $250bn of Chinese exports – could shave Latin America’s growth by as much as 0.5% of GDP.

That is because China is now a key driver of the region’s exports – shipments to the Asian giant rose 24% in 2018, well above those to the US and EU.

Which all goes to underline Latin America’s unfortunate timing, as a new wave of politicians promise to open trade after the region’s own populist cycle of protectionism comes to an end.

The positive news, however, is that Latin Americans may be making a virtue of bad timing.

First, US trade policy is prompting countries in the region to woo new trading partners.

Latin America is one of two world regions with the least intraregional trade – just 16% of exports head for neighbouring countries – which means both that it is failing to tap its own market, but also that there is huge room for growth.

Governments across the region are forging closer commercial ties.

The most exciting development is the convergence underway between the two main trade blocs, Mercosur – which includes Brazil, Argentina, Uruguay and Paraguay – and the Pacific Alliance formed by Chile, Peru, Colombia and Mexico.

Together, these giants account for 85% of Latin American trade.

According to a report by the Economic Commission for Latin America and the Caribbean (ECLAC), new governments more open to trade are giving momentum to this convergence.

Both blocs have been negotiating partnerships for some time, but Trump’s policies alongside political shifts in countries like Argentina and Brazil will accelerate this process.

At the same time, Mercosur has breathed new life into trade talks with the EU, and is also negotiating a pact with Canada.

The Pacific Alliance, meanwhile, is expanding. Latin American countries are queueing to join, and Australia, Canada, New Zealand and Singapore are now associate members.

National overtures

Meanwhile, the main actors in these blocs have all been courting each other.

Brazil – once a leading opponent of George W Bush’s doomed “Free Trade Area of the Americas” – has become a convert to lower tariffs.

It is one of only three countries to have liberalized trade rules on a net basis since the global crisis, it has established investment promotion agreements with all the Pacific Alliance members, and in November it signed a free trade deal with Chile.

Mexico has recovered from the headache caused by Trump’s tantrums over NAFTA by agreeing the new United States-Mexico-Canada Agreement (USMCA).

It is updating an existing trade deal with Brazil and is swallowing up its corn, has joined the successor to the Trans-Pacific Partnership (TPP) – a trade accord abandoned by Trump that also includes Chile and Peru – and has updated a 21-year-old pact with the EU.

The export outlook looks particularly good for Andean states, not least because of rebounding commodity prices.

Chile has been the main broker bringing Mercosur and the Pacific Alliance together, and was a key player in efforts to salvage the TPP, now called the CPTPP.

Peru is leading an export boom – trade is growing faster than in any other Latin American economy – and forging close commercial ties with China and India.

Colombian exports grew rapidly in 2018 and it is looking beyond the US – its top market – to Asia, where it already has a trade deal with South Korea and is talking to Japan.

Which all goes to show Latin America’s unique ability to turn bad timing into a virtue: Trump has inadvertently transformed the region into an unlikely champion of free trade.

Ask Macri.

He may still be smarting from a recent economic meltdown that sparked a currency crisis and an IMF bail-out.

But he knows better than most what a weaker peso means: the country’s exports have suddenly become much more competitive, and have started to recover.