According to a new report by ALADI, the Latin American Integration Association — an organization that comprises 12 Latin American countries, including Mexico and Cuba — there has been a significant increase in the volume of intraregional trade. “Exports have increased by 31.5% and imports have grown by 28.1%” during the first quarter of 2008 alone, when intraregional trade grew to about $6 billion.
Several factors are responsible for this new trade dynamic, says the report, which uses data supplied by the trade and investment agencies in each country. On the one hand, the devaluation of the dollar has pushed up most Latin American currencies, inspiring companies to look for new alternatives when it comes to pricing and logistics. Add to this the increase in the global price of petroleum and many basic commodities produced in the region. This trend has provided an opportunity for producers of those commodities to boost their revenues, and it has raised the region’s Gross Domestic Product. During the first quarter of 2008, the average GDP growth rate in Latin America was 5.2%, according to ALADI.
Javier Díaz Molina, president of the National Association of Foreign Trade in Colombia, says that Latin America has become a very attractive market for the region’s own importers and exporters. “Traditionally, Colombia’s foreign trade has been focused on the United States and Venezuela, two countries that collectively represent about 50% of our total sales today. But beyond those destinations, other nations in South America, Central America and the Caribbean now offer a range of business possibilities.”
Most Latin American countries have more purchasing power and that is turning into a good opportunity for trade. In Colombia, business people, unions and some state-owned institutions have begun to look more thoroughly at their neighboring markets to identify new sales opportunities in the region. “In the case of Colombia, two key factors are the dynamics of international demand and foreign exchange rates. When it comes to exchange rates, things are not going well: The Colombian peso has been significantly revalued. However, demand is positive, and it is always good to have buyers in your own neighborhood,” notes Díaz Molina.
A Great Waste
Jorge Alberto Velásquez, professor of international trade at the Bolivarian Pontifical University of Medellín (Colombia) believes that the slow pace at which countries like Colombia have forged links with their neighbors can be described as an “enormous waste” of an opportunity. Velásquez notes that Colombia’s failure to participate in Latin American markets “demonstrates, to some extent, insufficient action and energy when it comes to [doing business with] the rest of the neighborhood before jumping into other markets further away.”
When it comes to the seven leading countries of the region, Colombia’s share of intraregional trade varies from 12.4% of Venezuela’s bilateral trade, to a mere 0.2% in the case of Mexico. In 2007, trade with Colombia represented 10.3% of Ecuador’s entire imports. In Peru, that figure was 4%; in Chile, 0.9%; in Brazil, 0.4%, and in Argentina, only 0.2%. Velásquez believes these figures are very low if you take into account the fact that these countries have trade agreements that lower tariff duties and reduce non-tariff barriers to market access.
“Chile provides a striking case; we [Colombians] have a treaty [with Chile] that permits 97% of all Colombian products to enter duty free. And yet, our share of that country’s total imports isn’t even one percent,” explains Velásquez. He believes that the best opportunities for Latin American companies are in other markets in the region, where cultural and linguistic affinities as well as geographical proximity can make it easier to sell.
Velásquez says that this opportunity has been wasted, however, because “there is a shortage of trade intelligence, confidence and knowledge of neighboring markets.” In addition, the mass media in Latin America have focused on the region’s trade agreements with the United States and Europe, drawing the attention of local business people away from neighboring markets.
Moving ahead, Slowly but Surely
Germán Umaña, a professor of economics at the National University of Colombia, believes that it is a mistake to assert that there isn’t enough intraregional trade in Latin America. “Yes, there is some trade; however, there is not enough trade in commodities and raw materials. Those sorts of products go to developed countries. Remove petroleum and basic materials [from the figures], and you’ll see that exports are mainly manufactured goods and other products that have higher added value.” Umaña is the director of the National University of Colombia’s Research Center for Development (CID).
However, experts agree that Colombia has not taken full advantage of the opportunities offered by neighboring markets. “Almost every Colombian business person recognizes today that the Venezuelan market [for Colombian exports] is much more significant than the United States because it involves mostly value-added manufactured goods and products that generate more jobs and development,” explains Umaña. However, he regrets the limited impact that Colombian trade has had on its neighbors in Mercosur — especially in Brazil and Argentina, the largest members of the trading bloc, which also includes Uruguay and Paraguay.
Confronted with the crisis of a multilateral trading system, the countries of Latin America need to align themselves with alternatives that are sustainable and comprehensive. One of them is Unasur, the Union of South American Nations, which is backed by the governments of Venezuela, Argentina and Brazil. Unasur’s goal is to promote more opportunities for integration and development among the nations of South America. “There is a political will in these countries,” argues Umaña. “Brazil, for example, has a position of leadership in South America, and it is important to move in [the same] direction.”
However, there are a wide range of political viewpoints in Latin America today. That is the main barrier that needs to be overcome in order to achieve a higher level of regional integration, says Francisco Giraldo, a professor of international finance at Colombia’s Externado University.
Giraldo believes that when it comes to strengthening these markets, the main problem is “the political variations and changes in these countries, which lead to too many changes in trade flows.” For example, Giraldo notes, two countries may have a good political relationship with each other, under which trade prospers, but when that relationship deteriorates, the first thing that suffers is trade. This has been in the case recently when tensions grew between Colombia and Venezuela, between Bolivia and Peru, and between Chile and Bolivia — all because of verbal confrontations between those countries’ presidents. “Politics has a great deal of influence on trade in Latin America, unlike the situation in Europe. There, given the high level of integration, no matter who governs those countries the economic dynamics remain the same. This problem reflects the immaturity of many Latin American countries,” notes Giraldo.
An Investment Streak
Some months ago, José Ángel Gurría, secretary general of the Organization for Economic Development, unveiled the OECD’s Global Investment Report. Gurria emphasized that “Latin America plays an increasingly important role in the global economy. Latin America is one of the main engines of globalization, with annual foreign trade of $1.2 trillion — the equivalent of 71% of China’s foreign trade; foreign direct investment of $72 billion, and annual remittances of at least $48 billion.”
Investors in Latin America have awakened to the importance of increasing their presence in their neighboring countries. If the 1990s were characterized by the inflow of European and U.S. investment into Latin America, the last five years will be remembered for the movement of capital among Latin American countries, experts say. Imports, exports and mergers that were unthinkable a decade ago have begun to play a key role in the business environment.
Brazil and Mexico are two of the biggest players in that regard. For example, Petrobras, the Brazilian oil company, has either invested in or moved into most other South American markets. Camargo Correa, the Brazilian cement company, has acquired Loma Negra of Argentina. Votorantim and Belgo Mineira, both mining companies, have acquired Colombia’s Acerias Paz del Rio and Argentina’s Acindar, thus strengthening their presence in the region.
When it comes to Mexico, the investments of Cementos de Mexico (Cemex) stand out. Cemex is one of the three largest cement makers in the world, with plants in Central America, the Caribbean, Colombia, Argentina, and Venezuela. Another Mexican company following this approach is América Móvil, which has 147 million customers in the region and is the leading provider of cellular phone service, with a 65% market share in Brazil. Meanwhile Mexichem, the largest chemical and petrochemical company in Mexico, has acquired Brazil’s Amanco, Latin America’s leading producer of plastic tubing. Mexichem now operates plants in 13 Latin American countries.
For its part, Colombia’s Compañía Nacional de Chocolates has expanded into Central America, through its Cordialsa division, and Colombia’s Casa Luker has acquired Panama’s Galletas Pascual. Peru’s Alicorp, which belongs to the Grupo Romero, one of that country’s largest makers of personal care products, as well as Peru’s Grupo Gloria, an industrial conglomerate active in food, pharmaceutical and transportation markets, have been acquiring shares of companies in Argentina, Ecuador and Colombia.
The Challenge of Differentiation
A recent survey by ANDI, the national association of business executives in Columbia, found that one out of every three Colombian executives believes their company needs to make progress diversifying their markets. This view matches up well with the Colombian government’s strategy of intensifying its trade negotiations with various countries, a strategy that contains a strong Latin American component. Colombia has already signed trade pacts with Mexico and Peru, and it aims to deepen its agreements with the Andean Community of Nations, which comprises Colombia, Bolivia, Ecuador and Peru.
Luis Guillermo Plata, Colombia’s minister of trade, has also said that his government is interested in deepening its trade ties with the nations of Mercosur (Brazil, Argentina, Paraguay and Uruguay). Colombia has already signed a free trade agreement with Mercosur that cuts duties on both industrial goods and some agricultural products.
Although many people agree that there is a strong need to take advantage of these dynamics, business leaders and academics worry about how to address the fact that many countries in Latin America have similar economic structures. Their economies aren’t complementary; they compete with one another. Giraldo believes that, especially in South America, this has become the key factor that is limiting trade opportunities.
Nevertheless, Carlos Ronderos, former trade minister of Colombia, believes that this problem also offers an opportunity, provided executives in the region become aware of the importance of creating “clusters,” or partnerships that would enable companies to take advantage of the high prices of raw materials on global markets. Ronderos, a professor at the Sergio Arboleda University in Colombia, believes that companies also need to aggressively jump into creating products that have higher added value.
According to Ronderos, some Latin American countries can become the key suppliers of raw materials, while other countries can make the transformations that are needed to create value added products that generate additional jobs and promote further development in the region. Experts say that this next stage in the process could begin soon, judging from the increasing number of Latin American multinationals that are making a major leap toward greater prosperity and regional integration.
