Trade in Latin America: More Countries Are Turning to Their Neighbors for Business

by Dave

Most major Latin American cities (Lima, Caracas, Sao Paulo, Rio, Buenos Aires) , were founded on or near ports by the colonial Spaniards/Portuguese to facilitate the export of gold, silver, and other commodities to Europe and later North America. So, there has been an export-oriented infrastructure in place for 450 years. Infrastructure like roads, rail, to faciliate internal trade within and among Latin America was almost completely neglected. This condition has persisted into the present day

When I lived in Venezuela in late 2004/early 2005 – making a phone call to the US was 10c/minute but calling neighbouring Colombia was more than a $1/minute. Round-trip airfare from Caracas to Bogota/Panama City/Quito were double or more the price compare to Caracas/Miami – though flying distance was comparable or less.

Thankfully, with more infrastructure projects like the TransAndean and Transoceanic highway and more startup airlines like Azul costs to intra-LatinAmerican trade will keep falling. What is needed is more long-distance rail networks for both freight and passengers.
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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.

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.

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.”

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.