Latin America moves toward increased integration as U.S. protectionism grows
Latin America and the Caribbean is one of the two regions of the world with the least intraregional trade along with Africa. This is due to the fact that historically countless processes have been developed with different objectives and results, which have not only failed to integrate the region economically but have also led to fragmentation. The risk that the escalation of the Trump administration's protectionist agenda implies for Latin America opens a new window via which the two great regional blocs, MERCOSUR and the Pacific Alliance, could grow closer.
Unlike the European Union, where 64% of exports are intraregional, or East Asia and North America, where half of sales occur within the same region, in Latin America only 16% of exports are to a neighboring country. According to the report, “The convergence between the Pacific Alliance and MERCOSUR”, from CEPAL, this has led to a situation in which "production links between countries in the region are, in general, scarce and weak". This means that Latin America, with more than 640 million inhabitants, continues to miss out on the potential of its own market.
Around 80% of the population and 85% of Latin American trade is concentrated among the Pacific Alliance and MERCOSUR. However, regional trade is weak. This is worrying because it is through intraregional trade that countries tend to achieve the productive and export diversification necessary for development, and through which the majority of small- and medium-sized exporting enterprises are able to expand. Despite the shortcomings, the intraregional market absorbs the largest variety of products and is the main destination for manufacturing exports.
In this context, the proposal for "convergence in diversity" that the Chilean government put forward in 2014, which aims to bring the two blocs closer together, "will make it possible to generate new endogenous engines of growth and reduce the region's historic dependence on raw materials". But convergence between blocs goes beyond the simple elimination of tariffs, and there are many factors that affect value chain competitiveness. From an improvement in the quality of transport, logistics, digital and energy infrastructures that will result in cost reduction, to regulatory convergence, customs unification and trade promotion, which simplify and streamline trade.
Academic José Briceño classifies the different regional integration models as open (Pacific Alliance), revisionist (MERCOSUR) and anti-systemic (ALBA). However, in recent years there has been some reconciliation among the countries of the Pacific Alliance and MERCOSUR. In recent years, Brazil has established investment promotion agreements with all members of the Pacific Alliance, while Mexico is negotiating far-reaching trade agreements with the two largest MERCOSUR partners to complete the liberalization of the region's two most important bilateral trade relations.
Beyond the concrete steps toward becoming closer, recently new governments with more open positions have given "clear signs of wanting to accelerate and deepen the process of convergence," according to the CEPAL report. But before moving forward in that direction, both blocs will probably seek to finalize the processes of renegotiating NAFTA, and the negotiation for MERCOSUR with the European Union.
Currently, MERCOSUR and the three South American members of the Pacific Alliance already comprise what is close to a free trade area for goods. And trade in services, government procurement and investment are well advanced. However, beyond the progress made, the rapprochement between the two blocs should take shape in the medium term, since an integrated regional economic space would strengthen the region's negotiating power.
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Jeronimo Giorgi, a Uruguayan journalist dedicated to international issues, is pursuing a master's degree in Latin American Studies. He has collaborated with various media outlets in Latin America and Europe, and has received distinctions such as the Premio Rey de España for Journalism.
Latinoamerica21 is a blog about current economic, political and social topics in Latin America that is currently published within the newspaper El Observador de Uruguay and Pagina Siete in Bolivia, and will soon be published in other media outlets within the region. The original version of this blog post is available in Spanish: Más integración regional frente al creciente proteccionismo de Trump
*Guest blog posts do not reflect the views of FocusEconomics.
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Date: June 18, 2018
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