Latin America’s Big Opportunity
Published in Listín Diario
(Dominican Republic) on 2 August 2020
by Jonathaan D'Oleo Puig (link to
original)
In 2005, with the ending of the Multifiber Arrangement, a group of economies in Latin America received a serious blow. This agreement had allowed developing countries to export textiles to industrialized countries according to preestablished quotas. Since Asian countries like China, Taiwan and Vietnam, had, and continue to have, an advantage in comparison with their counterparts in Latin America in terms of the export of textiles, when the markets were liberalized, Asian countries were the winners and we the losers.
Mexico closed dozens of textile factories at the border with the United States. In Central America and the Caribbean, the same: A large part of the “free trade zones” where textile production took place significantly reduced their operations or closed definitively, relocating to Asia where they would have more and cheaper access to laborers. In consequence, unemployment in Latin America increased and the economic dynamism of certain regions, like the northern border area of Mexico, shriveled up.
Now, 15 years after that shift, Latin America might have an opportunity to regain its lost territory in the textiles market, thanks to two factors. First is the lack of confidence in China that is a consequence of the COVID-19 pandemic. In parallel, the White House has been engaging in a trade war with Asia, in particular aimed at the Communist dictatorship of Xi Jinping.
The opportunity open to Latin America in this sense is even more important when we consider both the weaknesses of the Asian market and the same advantages our countries enjoy in comparison to the Asian economies. We have some leverage in relation to the exportation of textiles to the United States and to Canada, in particular.
What Advantages Do We Possess?
First, there is the trade balance of our countries with respect to the United States. Currently, most South American countries have a trade deficit with the U.S., which means that overall, we are importing more than what we are exporting to the developed countries of North America. How does this benefit Latin America? Thanks to the deficit, our economies should not be affected by protectionist policies coming from the United States or Canada.
In contrast, in the case of China, the White House has been tightening restrictions significantly on imports due to China’s trade surplus of $400 billion with the United States. It should also be noted that this surplus exists, in part, thanks to the devaluation of the Chinese currency, a strategy promoted by the Communist government to maintain and strengthen the economy’s leadership in export markets. China’s policy of devaluing its currency actually constitutes a violation of the regulations instituted by the World Trade Organization for its member countries: The devaluation of currency artificially tilts the playing field in which economies compete to export and import.
Second, Latin America has an advantage over China because our economies are closer to the United States and Canada — geographically of course, but also politically and culturally. These similarities, in turn, significantly reduce freight costs and increase the fluidity of negotiations between the parties involved, respectively.
Many Latin American countries, including Mexico, Peru, Colombia, the Dominican Republic and all of Central America, have free trade agreements signed with the United States. In Asia, only South Korea, Japan and Singapore have signed free trade agreements with the U.S. The strength of these three Asian countries is not in the exportation of goods that require cheap labor. Instead, they sell goods that are more sophisticated with added value. Therefore, even though they already have a free trade agreement with the U.S., these Asian countries are not a threat for Latin America in terms of the production of textiles for exportation.
In sum, Latin America, especially Central America, Mexico and the Caribbean, should take advantage of current economic circumstances to present proposals to multinational companies, with the goal of convincing them to relocate here. In the medium term, such a strategy can help reduce our high rates of unemployment.
I must be clear, though, that this type of direct foreign investment is not, nor will be, the panacea that brings our region to the next rung in the process of transformation toward becoming a developed economy in the information age. For that, we need to train our human resources via a more sophisticated educational system, and we need leadership that promotes competence and cooperation, as opposed to exploitation and a culture of “take it from you and give it to me.”
Mexico closed dozens of textile factories at the border with the United States. In Central America and the Caribbean, the same: A large part of the “free trade zones” where textile production took place significantly reduced their operations or closed definitively, relocating to Asia where they would have more and cheaper access to laborers. In consequence, unemployment in Latin America increased and the economic dynamism of certain regions, like the northern border area of Mexico, shriveled up.
Now, 15 years after that shift, Latin America might have an opportunity to regain its lost territory in the textiles market, thanks to two factors. First is the lack of confidence in China that is a consequence of the COVID-19 pandemic. In parallel, the White House has been engaging in a trade war with Asia, in particular aimed at the Communist dictatorship of Xi Jinping.
The opportunity open to Latin America in this sense is even more important when we consider both the weaknesses of the Asian market and the same advantages our countries enjoy in comparison to the Asian economies. We have some leverage in relation to the exportation of textiles to the United States and to Canada, in particular.
What Advantages Do We Possess?
First, there is the trade balance of our countries with respect to the United States. Currently, most South American countries have a trade deficit with the U.S., which means that overall, we are importing more than what we are exporting to the developed countries of North America. How does this benefit Latin America? Thanks to the deficit, our economies should not be affected by protectionist policies coming from the United States or Canada.
In contrast, in the case of China, the White House has been tightening restrictions significantly on imports due to China’s trade surplus of $400 billion with the United States. It should also be noted that this surplus exists, in part, thanks to the devaluation of the Chinese currency, a strategy promoted by the Communist government to maintain and strengthen the economy’s leadership in export markets. China’s policy of devaluing its currency actually constitutes a violation of the regulations instituted by the World Trade Organization for its member countries: The devaluation of currency artificially tilts the playing field in which economies compete to export and import.
Second, Latin America has an advantage over China because our economies are closer to the United States and Canada — geographically of course, but also politically and culturally. These similarities, in turn, significantly reduce freight costs and increase the fluidity of negotiations between the parties involved, respectively.
Many Latin American countries, including Mexico, Peru, Colombia, the Dominican Republic and all of Central America, have free trade agreements signed with the United States. In Asia, only South Korea, Japan and Singapore have signed free trade agreements with the U.S. The strength of these three Asian countries is not in the exportation of goods that require cheap labor. Instead, they sell goods that are more sophisticated with added value. Therefore, even though they already have a free trade agreement with the U.S., these Asian countries are not a threat for Latin America in terms of the production of textiles for exportation.
In sum, Latin America, especially Central America, Mexico and the Caribbean, should take advantage of current economic circumstances to present proposals to multinational companies, with the goal of convincing them to relocate here. In the medium term, such a strategy can help reduce our high rates of unemployment.
I must be clear, though, that this type of direct foreign investment is not, nor will be, the panacea that brings our region to the next rung in the process of transformation toward becoming a developed economy in the information age. For that, we need to train our human resources via a more sophisticated educational system, and we need leadership that promotes competence and cooperation, as opposed to exploitation and a culture of “take it from you and give it to me.”
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