Nations buy from and sell to their immediate neighbors. That’s a basic trade theory. However, Latin America continually proves it’s an exception to this theory.
A look at intraregional and interregional trade in Latin America over the past two decades provides some meaningful trends.
For each of the top 10 economies in Latin America as measured by GDP, we examined the amount of overall trade conducted by trade partners within Latin America (“intraregional trade”) versus the amount of overall trade conducted with outside trade partners (“interregional trade”). Because the geographic definition of Latin American can be inexact, we considered the region as the universe of countries in both North and South America that geographically fall below the United States.
My previous column (May American Shipper, pages 22-23) examined the extreme substantial growth in total trade during the past two decades. However, we found that on an absolute basis trade outside of Latin America has driven the lion’s share of this growth. In Brazil, for example, the region’s biggest economy, interregional trade has been responsible for 81 percent of overall trade growth during the past 20 years — and that’s before realizing the impact of the trade agreement the country enacted with China in 2012. Mexico’s inclusion in NAFTA has resulted in an impressive aggregate increase in trade volumes, and a steady net basis growth rate. Yet intraregional trade hardly registers as a share of overall trade growth.
On the flip side, countries like Argentina, Ecuador, and the Dominican Republic, which have been comparatively resistant to trade liberalization policies over the past 20 years, are more reliant on intraregional trade to drive overall trade growth.
They are the exception to how trade in the region has trended overall, with the volume of intraregional trade for Latin American continuing to grow but at nowhere near the pace of interregional trade.
Intraregional trade patterns in Latin America have also shifted since 1995, with the five biggest economies having different orders of top trade partners today compared to 20 years ago.
Our analysis also reveals that Latin America’s proportion of intraregional trade to interregional trade has remained relatively flat since 1995. With a couple exceptions, the region’s top 10 economies are about as dependent on interregional trade as a percentage of overall trade now as they were then. Again, those exceptions are the Dominican Republic, which conducted 9 percent of its trade intraregionally in 1995, but 24 percent in 2012, and Ecuador, which had its share of intraregional trade increase from 25 percent in 1995 to 33 percent in 2012.
Latin America as a whole has generally been less reliant on intraregional trade than other powerful economies. China, for example, still relied on Asia for 48 percent of its total trade in 2012 after conducting 58 percent of its trade within its own region in 1995. In Europe, France, Germany, and Italy have all followed a similar trajectory.
Latin America’s reliance on intraregional trade as a percent of overall trade ranges from Argentina on the high side (41 percent in 2012, up from 36 percent in 1995) and Mexico on the low side (6 percent in 2012, virtually unchanged from 5 percent in 1995), with most countries in the region falling between 20 and 30 percent.
The region’s difficulty in advancing intraregional trade are not surprising. Latin America has a lasting dependence on commodities for its overall trade output, and there is only so much Brazilian soybean, Colombian coffee, or Argentinian wine, for example, that the rest of the region will consume when many of them also have similar resource-based economies. The demand is simply coming from elsewhere in the world. China’s appetite for commodities, which has grown significantly over the past decade, is an example of why the region’s interregional trade has grown in recent years.
A 2015 World Bank report argues that the region does a poor job of establishing the sort of intraregional trade linkages that would boost trade with advanced economies elsewhere in the world. It points to the fact that other areas with sparse intraregional trade networks, like East Asia in the 1980s, have since remedied this weakness by participating more actively in global value chains. The shift toward manufacturing-based economies stimulated this increase in intraregional trade within the East Asian region.
In Latin America, transportation costs also run high and infrastructure tends to be inadequate. The Latin American Economic Outlook 2014 shows the region’s logistics costs are almost nine-times larger than tariffs and far greater than in the 34-country Organization for Economic Cooperation and Development area. Meanwhile, according to the World Economic Forum’s Global Competitive Report, Latin American countries lag even other emerging economies in quality of infrastructure. Brazil ranks 104th overall, with Peru, Argentina, and Venezuela still further behind.
The World Bank, in its report, recommended trade policy to better utilize the commercial and financial connections between countries. One such step would be to streamline the bureaucratic import and export processes that tend to be more cumbersome for Latin American countries.
Another challenge for Latin America nations is that they still trade more with the United States than with each other. Mexico’s 2012 exports to the United States alone, for instance, are roughly the same as the intraregional trade of Latin America’s top five economies put together. In aggregate, Latin America’s top five economies traded $662 billion of goods with the United States and $247 billion within the region. This is attributable to Mexico’s inclusion in NAFTA, as well as the United States’ voracious appetite for trade in general.
But the region’s investments in itself is more of a positive story. According to the Council on Foreign Relations, Latin America’s “2010 outlays from within the region in their neighbor’s markets hit $43 billion — almost triple China’s $15 billion contribution.” The council noted this capital tends to go into stimulative industries like financial services, retail, and utilities.
Intraregional trade in Latin America has been overshadowed by interregional trade, but both are growing — combined, Brazil and Mexico grew total trade $873 million, or 462 percent, since 1995. For companies and service providers that have a vested interest in seeing the cumulative volume of goods moving to and from Latin America increase, these are positive trends.
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This column was published in the July 2015 issue of American Shipper.