Trade winds west?

21/03/2006 | Duncan Hooper

Scaling back dependence on US trade is vital for Latin America’s prosperity, Brazil’s foreign minister Celso Amorim tells Emerging Markets. But the real test is yet to come

Brazilian foreign minister Celso Amorim isn’t impressed with the trade deal a group of

Central American countries extracted from the United States in June 2004.

“They probably think they got good value, but they will continue to import subsidized products from the US because they couldn’t deal with this problem,” he tells Emerging Markets. “Mind you,” he adds, “it’s their business not my business.”

The tough bargaining and mixed messages sent by CAFTA and the February 27 US-Colombia trade pact have convinced Amorim of the need to broaden trading relationships and reduce reliance on a US market increasingly subject to protectionist tendencies. Many of Brazil’s neighbours would also benefit from such a shift.

“Economically speaking, the region is too dependent for its own good,” says Liliana Rojas-Suarez, senior fellow at the Center for Global Development and a former Deutsche Bank chief economist.

Diversification

Of course that’s not new. What’s different now is that for the first time in many years alternative markets are posing attractive export alternatives to the US. “The developments in the world economy are great because it’s an opportunity for Latin American countries to get the diversification they need,” Rojas-Suarez tells Emerging Markets.

China and India are taking over as the motors for global growth, sucking in the commodities products that constitute the bulk of Latin America’s exports. The Japanese and European economies are also witnessing long-awaited upturns, and thanks to these trends, Brazil has managed to cut the proportion of its exports heading to the US from more than a quarter to less than a fifth over the past three years.

The terms of world trade are also changing. The protectionist winds that forced Washington to play hardball in its bilateral trade negotiations have been whipped up by pressure from globalization. What opponents describe as one of the most one-sided trade deals in the world passed through congress by the slimmest of margins: 217 votes to 215.

The CAFTA deal, like the free trade agreement with Colombia, retains strict limits on the commodity most tempting for South and Central American farmers – sugar. At the same time, US agribusinesses gain access to corn, sorghum, poultry and dairy markets in the south, which campaigners at groups such as Christian Aid say will wipe out thousands of local incomes.

The implementation of the treaty in El Salvador was marked by rioting in the streets, and Costa Rican president Oscar Arias found a comfortable poll lead whittled down to the narrowest of margins after opponents seized on his support for the trade deal.

Clearing the way

At the same time as other markets are developing for Latin American exports, the routes to those markets are also being cleared. The region is likely to be a big winner from a deal at the World Trade Organization aimed at freeing up commerce by reducing barriers to trade.

“I think the WTO talks should diminish Latin American dependence on the US,” Amorim tells Emerging Markets.

A WTO deal will force diversification even onto the US’s closest trading partners. Mexico, for instance, which sells 90% of its exports to NAFTA countries, will find that the favourable trade terms it currently enjoys will be undermined when import barriers are lowered universally – a process known as preference erosion.

“Our competitive edge will be cut by a few points,” says Fernando de Matteo, Mexico’s ambassador to the WTO.

Under a more liberalized trading system factories that have located in Mexico to serve the North American market will find it more attractive to export elsewhere as well, de Matteo hopes. He’s targeting Europe, Canada and South America as future growth markets because cultural and linguistic differences can be barriers to Mexican companies operating in Asia.

His Honduran counterpart, Dario Castillo, is similarly optimistic, pointing out that so-called south-south trade is growing faster than the traditional north-south routes.

“As time goes by Latin American countries will start to develop their markets much better; it will give Honduras the chance to seek opportunities there,” Castillo tells Emerging Markets.

Rojas-Suarez is more sceptical about whether the shift in trading patterns is permanent. Of all the Latin American countries, only Chile has consistently pursued a credible policy to reach out to new markets, she says, and a global down turn could see recent trends reversed.

Trade diversification in Latin America isn’t simply a matter of schooling businessmen in mandarin and building bigger ports. The region’s currencies remain closely correlated with the dollar, and export balances are extremely sensitive to commodities prices. It’s easy to paint a rosy picture in the good times, but the real test of whether Latin American exporters have broken free of their US dependence will come during a slump.

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