July 16, 2017

EIU Report Highlights Deepening Free Trade and Regional Integration in Latin America

My previous post provides an overview of a whitepaper published by The Economist Intelligence Unit (The EIU) that focuses on quantifying market opportunities in Latin America's cities. This post addresses another EIU whitepaper that highlights Latin America's new trade agenda. Segmented in three sections: (1) An agenda for regional integration, (2) a new global trade agenda, and (3) economic benefits and political challenges, the whitepaper's key findings are copied below in its entirety:
  • Growing protectionism in the US under the administration of Donald Trump has spurred Latin American leaders to seek new, deeper economic relationships, both within the region and with trade partners in Asia and Europe.
  • With Latin America bucking the anti-globalization trend, The Economist Intelligence Unit is—for the first time in decades—more optimistic about the deepening of free trade and regional integration in Latin America.
  • The regional integration agenda will seek to deepen ties in three main areas: among members of the Pacific Alliance free-trade area (an integration project that includes Chile, Peru, Colombia and Mexico); between the Pacific Alliance and Mercosur (the Southern Cone customs union, comprising Argentina, Brazil, Paraguay and Uruguay); and between Mexico and the rest of Latin America.
  • Latin America's leaders will have two key priorities in trade relations with the rest of the world: securing an EU-Mercosur free-trade deal, and resurrecting the Trans Pacific Partnership (TPP) without the participation of the US.
  • After initial skepticism, we are increasingly optimistic about the chances of these deals being made.
  • Greater integration and further trade liberalization would bring real benefits for businesses investing in Latin America, and for the region's growth outlook.
  • The main obstacle to the trade and integration agenda is political. Presidential elections in 2018 in major economies in Latin America, including Brazil, Mexico and Colombia, have the potential to spring surprises and shift the pro-free-trade stance that currently dominates Latin America.
I agree that "the Pacific Alliance will be central to regional integration efforts." The whitepaper further claims: "The Pacific Alliance touts itself as a market to rival Brazil or India in size. While it is true that the GDP of the four-country alliance exceeds that of Brazil, geographical obstacles and weaknesses in transport infrastructure mean that the Alliance is not a true single market. Yet it does have ambitious objectives that go beyond the free movement of goods (tariffs are set to be eliminated by 2020) to the free movement of services, financial resources and people."

Importantly, "the Pacific Alliance is, essentially, in the driver's seat in terms of developments that could bring real benefits in the form of increased foreign direct investment (FDI), economic diversification and raised productivity via the establishment of the value chains that South America currently lacks."

Lastly and most crucially, The EIU says:
Greater integration and free trade would bring real benefits for businesses investing in Latin America. Along with the reduction of tariffs and non-tariff barriers themselves, harmonization of rules of origin and regulatory standards, and a greater focus on trade promotion would bring more opportunities for trade and investment. Associated infrastructure development to support increased trade—backed by an improving regulatory and institutional framework for public-private partnership (PPP) projects—also represents an important potential driver of growth. Developed fully with a schedule of supporting structural reforms and investments in human capital, the trade and integration agenda could also lead to participation in global value chains from which the region is currently mostly absent. This could in turn be a driver of a move up the value chain and an increase in Latin America's productivity and economic growth.
Separately from its report, The EIU held a webinar, "Brazil: Back on track?" on June 29, 2017 about the future of Brazil in light of the corruption scandals surrounding the president, Michel Temer. The webinar poses three important questions:
  1. Will the Temer government survive?
  2. Will Brazil get its public finances in order, and what will happen to the economy next year?
  3. What is the outlook for elections in October 2018 and beyond?
Despite the political turmoil taking place in Brazil and Venezuela (the latter facing a significantly greater political and economic crisis compared to the former), deepening free trade and regional integration in Latin America presents an opportunity for businesses seeking to take advantage of a market where The EIU is forecasting a rise in the region's gross domestic product.

How does Latin America fit in your business's international growth strategy?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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