Near or far: Latin American trade

Why hasn’t trade in Latin America grown faster? And additionally, where does the United States fit into the process? These aren’t new questions, simply questions that are rolled over like sovereign debt to the next administration or generation to reframe.

Back in November of 2023, the International Monetary Fund (IMF) released an article entitled “How Latin America Can Use Trade to Boost Growth” that began with the opening sentence, “Most countries in Latin America and the Caribbean aren’t fully harnessing the potential of international trade, an important driver of growth for emerging market economies.”

For Latin America capitalizing on trade opportunities is a multi-layered challenge, but as the IMF article suggests, trade is the driver of economic growth.

Trade also means having trade partners and the United States, China and Europe are the logical trading partners for historical, economic and political reasons. But timing is also a feature in international trading relationships that is somewhat undervalued. The ongoing trade war between the US and China is providing Latin America an opportunity to take advantage of a number of trade trends. And how long the window of opportunity remains jarred open is difficult to forecast.

Nearshoring and Variations on the Theme

In the US, and even in Europe, there is a growing movement to disengage from sourcing in China. The growth of manufacturing in Vietnam and other Southeast Asian countries is largely attributable to this trend. China+1, China+2 and other alternative sourcing strategies are part of every retailer’s boardroom deliberations. And alternatively in China, manufacturers are looking to shift their facilities overseas to both lower costs — as China’s wages are moving upward and labor getting tighter with population shifts — and to lower exposure to tariffs and other geo-political tensions.

In the US, particularly in the highly charged election atmosphere, there is rhetoric that abounds promoting reshoring or returning (or building) manufacturing in the US. The CHIPS Act is a federal government manifestation of that trend.

Still, nearshoring or friend-shoring is a practical alternative to outright uprooting a sourcing system.

Mexico via NAFTA and the succeeding agreement USMCA (United States-Mexico-Canada Agreement) had a head-start on “nearshoring” even before the term came into use. A Brookings Institute study article on the USMCA in March noted, “Mexico has been fortunate to be in the right place at the right time to leverage its own development by taking advantage of both USMCA and nearshoring in advanced manufacturing.” In 2023 Mexico at $798 billion became the United States’ top trade partner overtaking China and Canada, in no small part because of nearshoring. The integration of Mexican, US and Canadian manufacturing, especially in automaking, underscores just how effective nearshoring can be for an economy and as a strategy to diversify sourcing. It isn’t surprising that at $48.4 billion, autos are now Mexico’s biggest export item. Now IT is looking into nearshoring in Mexico — another step up in the value chain. And it isn’t surprising that China’s…