Latin America and the Trade War

Ingo Plöger, President of the Strategical Council of CEAL

The U.S.-led trade dispute involving the European Union, China and other countries has led companies to reshape their business in the face of immediate uncertainty. Latin America, although not directly linked to U.S. trade protectionist objectives, perhaps with the exception of Mexico, has been affected by this new situation.
The U.S., China and the European Union, which share almost the same GDP of $18 trillion, have a very different external dependence. Whilst China and the U.S. have almost the same size in the export-import-to-GDP ratio, of approximately 22-27 percent, the European Union has something around 70 percent! It is clear that in a trade war the European Union will pack a much harder punch than China and the U.S.  Latin America has a foreign trade-to-GDP ratio also in the order of 21 percent, similar to China and the U.S. The relative ratio of foreign trade to GDP in the order of 20-27 percent in China, U.S. and Latin America does not mean that the economies are closed, but the characteristic of having economies of a long productive chain, –that is, from the raw material up to the processed product, including energy production and logistics– is different from the one in the European Union, Japan, Singapore and South Korea, where they have a short productive chain, importing raw material and energy and transforming them locally. The European Union and the other countries with short productive chains have focused their strategies very much on international free trade, where semi-finished products would be predominant due to the added value they would receive in countries with high technological performance. The division of intelligent and high value labor for these countries is of vital importance. While in countries with long productive chains, infrastructure and logistics are crucial.
The U.S. strategy of America First will favor the local productive chains, hence the priority to renegotiate NAFTA with Canada and Mexico, since they would give a comparative advantage to the U.S. in its negotiation, mainly with China and the European Union. The U.S. clash with China will be much more in similar product categories, while the clash with the European Union will be with products of high technological potential. In the early moves between China and the U.S., commodities were the most affected, such as steel, soybeans and corn on the American side, and technology products for the Chinese side. On the European side it is the manufactured goods and final products, such as automobiles and other industrial consumer products.
In Latin America, Mexico, in defining its position favoring the U.S., will have a difficult negotiation with China in the semi-finished products that are sent for assembly in the U.S., but surely there will be a recomposition. In other countries, there will be a strong market dispute, as China increases its investments in Latin America and the U.S. following in order to maintain its position of influence in the region. China will project itself more heavily on infrastructure investments and grassroots industries while the U.S. will pursue industry, commerce and services as its preferred focus. The European Union will be the most reluctant due to its attitude of caution and skepticism, losing important spaces. Multilatina companies may be “take over” targets, as well as being able to better exploit their local presence. The best example is what is happening in the pulp and paper sector, where China, the U.S. and Brazil assume global player roles through their acquisitions. Embraer and Boeing show the American appetite, and the Bayer-Monsanto case demonstrates the European agribusiness strategy. Thus, the clash results in the dispute of investments and commerce.
A trade war does not help anyone, and the outcome is always uncertain.
Expectations of gaining are often thwarted because the network of globalization is much more complex, dense and ambiguous than we imagine and we cannot anticipate all the gains and losses. One thing is certain, Latin America will be affected, and protectionism should not be an argument for politicians or businessmen, but a united Latin America will make all the difference.



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