Latin America’s trade blocs – crumbling edifices or economic building blocks?

By: | Issue #670 | at 10:00 AM | Channel(s): International Trade  

Will interest in Latin America’s trade blocs help solidify the region’s economies?

“Nothing is built on stone; all is built on sand, but we must build as if the sand were stone.” Argentine poet, Jorge Luis Borges

When the Argentine poet wrote, “Nothing is built on stone; all is built on sand,” he could easily have been describing the ever-shifting economic fortunes of Latin America. There was a time leading up to the global financial crisis of 2009, when trading blocs like Mercosur, the CAN (Andean Community of Nations), CARICOM (Caribbean Community), Pacific Alliance and even NAFTA (North American Free Trade Agreement) held the promise of building a stronger economic foundation for the Latin American region. Many economists (and publications like AJOT itself) optimistically forecasted that the teens – 2010 to 2019 – would be a boom era for Latin America.

But for both regional and global reasons, the “boom” never fully materialized and now there is less economic certainty for Latin America.

In late January – which in the context of recent events seems like a millennium ago - an IMF (International Monetary Fund) blog entitled Latin America and the Caribbean in 2018: An Economic Recovery in the Making (Editor’s italics) offered what in hindsight seems to be an optimistic view of the region’s prospects. The IMF blog forecasted that the region (excluding Venezuela) in GDP terms was to grow by 2.5% in 2018 and 2.8% in 2019. In fact, with the exception of Venezuela, all of the nations in the region were expected to register positive growth over the next two years.

In countries like Chile, the IMF expected growth in the neighborhood of 3% based on higher copper prices and “improving business sentiment.” A similar performance was forecasted for Columbia and Mexico, and Peru was inked in at a region high 4% growth for both 2018 and 2019.

The IMF forecast wasn’t the only multinational entity with an optimistic outlook. The ECB (European Central Bank) in its January 2018 meeting released a report noting, “Excluding Venezuela, regional growth is expected to be 2.5% in 2018.” The report added, “Excluding Venezuela, all IDB [Inter-American Development Bank] borrowing countries are now expected to post positive growth for 2018. Nine countries are expected to grow at more than 3.5%, including the Dominican Republic, Nicaragua, Panama, and Peru - all expected to grow at 4% or higher.”

And there has been some positive economic activity to support the contention of growth in Latin America. The WTO (World Trade Organization) in their April 12th global trade report, pointed out, “South and Central America and the Caribbean’s import growth turned positive again in 2017 with an increase of 4.0%, following three years of steep declines.” The poor performance of imports in Latin America had been a major area of concern for economists.

Even with the improvement in imports there are a number of structural issues that remain unresolved. Perhaps the single most important issue going forward is the economic (and political) relationships between the individual Latin American nations through blocs like Mercosur. Without the region leveraging its collective economies, it’s hard to feature GDP growth matching other developing regions – especially Asia.

The WTO explained the concern in their trade report, “Between 1960 and 2017, the average per capita growth rate of real GDP in Latin America and the Caribbean was 2.4% per annum—substantially below that of the rapidly-growing Emerging Asian countries (4.9%) and behind the 2.6% average for all countries in the world that are not in the region…”

Mercosur’s uneven economic results during the last eight years underscores why the anticipated economic “boom” unceremoniously sputtered out. The Mercosur bloc comprises Argentina, Brazil, Paraguay, Uruguay, and Venezuela. In many respects, the bloc owes its existence to a brief period of rapprochement in the early 1990s between traditionally regional adversaries Argentina and Brazil. At its core, the bloc’s goal was to improve trading relations between the members. Initially, Mercosur did improve intra-regional trade and open up trade. Trade within the bloc rose from $4 billion in 1990 to more than $40 billion a decade later.

However, since the “Great Recession” intra-Mercosur trade has bumped along buffeted by regional events like Brazil’s 1999 currency devaluation or Argentina’s financial crisis in 2001, during which the country defaulted on $132 billion of foreign debt. Today little looks any better. Argentina is in an ongoing financial crisis with no immediate end in sight and Brazil’s scandals have rocked nearly every corner of Latin America’s largest economy.

The Argentine situation is emblematic of the difficulty sustaining growth for many Latin American nations.

In the middle of 2016 it appeared that Argentina would be able to sustain recovery and curb inflationary trends. Historically two elements have fed the boom-bust cycle in Argentina – the debt burden of the government and an economy largely based on consumption. In good times, consumption has buoyed the economy and encouraged investment. In bad times inflation, has over powered domestic fueled growth and created monetary pressures.

The early forecasts for 2018 put GDP growth at 2.8% for the year. But by the end of 2017, inflation in Argentina was around 25%, the peso was dropping against the U.S. dollar and the projected growth revised downward to as low as 0.5%. By May 2018 the Argentine economy was in full crisis mode with government pleading with investors not to pull their money out of the country and inflation doggedly remaining in the mid-20s, bank interest rates hit 40% and the Central Bank lost $10 billion in reserves - an unsavory recipe for growth. In June Argentina was able to negotiate with the IMF for $50 billion loan to shore up finances – the country couldn’t look elsewhere for a loan because of the 2001 debacle. Will the IMF intervention work now is anybody’s guess?

But Argentina’s economic woes are far from the region’s worst. The Venezuelan economy has all but disintegrated (a negative growth of 15% GDP estimate by IMF 2018), Nicaragua is in a downward spiral and Guatemala’s economy is crumbling. Collectively these concerns are a drag on growth for a region that should be poised to take advantage of global trade trends such as the emergence of China as a counter weight to the U.S.

In April, Vice President Pence traveled to Lima, Peru to address the 8th Summit of the Americas. He was standing in for President Trump and his opening remarks talked about Syria, Russia and Iran. Although he did say “America first doesn’t mean America alone,” and with the exception of an ongoing problem in Venezuela and a mention of the deal to allow Colombia better access of avocadoes for expanded access of U.S. milled rice, much of the speech was about U.S. policies – particularly the border security policies. Trade and trade policies were decidedly secondary. With a trade war looming – Brazilian steel exports to the U.S. are in the crosshairs – it was a curious tact. Pence is due back to South America (Brazil) this month so perhaps the trade issues will be addressed at those meetings.

Nonetheless, there is the sense the U.S. is missing the boat when it comes to trading opportunities in Latin America. The idea that the U.S. would naturally have a predominate trade position in Latin America because of geography and shared history is being re-written by China’s economic presence in the region. It took less than two decades for China to emerge as the number two trading partner for the region – much of this taking place while the U.S. was a more active economic player in the region. In another five or ten years, what will be the U.S. position based on the current trajectory?

New Building Blocs

When the U.S. withdrew from the TTP (Trans Pacific Partnership), the remaining 11 nations negotiated a new accord, the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership). The new agreement included many of the old agreement’s provisions. While it is too soon to say whether the CPTPP will link with any of Latin America’s existing trade blocs, the possibility is intriguing. At the moment Argentina and Brazil, two of the three largest Latin American economies, do not have any free trade agreements (FTAs) in Asia. CPTPP and Mercosur engagement has possibilities. Perhaps a better fit is the Pacific Alliance, consisting of Chile, Colombia, Mexico, and Peru (in June, Ecuador formally requested membership), and last year added three Asia-Pacific countries (Australia, New Zealand, and Singapore) as associate members alongside Canada. The group, which already represents 57% of Latin America’s trade, is looking to fully integrate these associate members in the future.

With Brexit looming, the U.K. has expressed interest in improving trade relations with the Latin American pact through an FTA. The bloc is also looking into building new similar relations with the EU. And it recently accepted the UAE and Belarus as observer nations.

For Latin America’s trade blocs, there now is an opportunity to cement trade ties and to build an economic underpinning to fully realize a boom period like Asia has experienced.

American Journal of Transportation