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Trade between Latin America and Asia had already lost some of its growth dynamic before coronavirus, as trade tensions and uncertainty weighed on economies in 2019. But by May of this year, LatAm global export and import volumes had fallen by over one-quarter compared to end 2019 – more than the declines experienced by mainland China and other leading emerging markets in Asia.

The World Trade Organization expects GDP and import growth to contract more steeply in Latin America this year than in any other region. Latin American exports are expected to shrink as well, but more in line with world merchandise trade overall. The US-China trade tensions are having a mixed influence though: mainland China is now buying some agricultural products from LatAm suppliers instead of from the US, but global demand and foreign direct investment are down in part because of weakened performance in US and China.

By 2018, 29 per cent of South America’s global exports went to East Asia, turning a trade deficit with the region into surplus. Brazil is particularly dependent on the Chinese market, but exports are largely commodities such as oil, iron ore, soyabeans, wood pulp, and frozen beef.

Making more-sophisticated products could help improve LatAm productivity growth, which has been negative for about a decade. Increased participation in global and regional value-chain production could help to expand the range of products traded and promote technology transfer.

Further trade liberalisation would support such engagement, while also increasing competition and incentivising firms to improve productivity, innovate and differentiate their products.

LatAm countries are tackling some of these issues with bilateral and regional free-trade agreements. However, multiple overlapping deals should be consolidated to reduce complexity and aid flexibility in sourcing and selling goods, while improved alignment with international standards would reduce costs.

Emerging-market investment is often trade-related, but foreign direct investment into Latin America and the Caribbean is expected to halve this year. Services trade liberalisation and regulatory reform may help to improve prospects including investment in value chain production.

Depending on the course of the pandemic, the World Trade Organization has forecast a return to goods-trade growth in 2021, including for Latin America and Asia, albeit from a reduced base. Among international businesses, COVID-19 has increased interest in supply-chain agility and resilience: for LatAm that presents opportunities.

High-standards free-trade agreements can be a means to improve market access, tackling not only tariffs but also other impediments such as customs burdens. Value chains are sensitive to this.

A number of LatAm countries enjoy preferential access to the US and a few benefit from proximity to the US as well. Mexico has reduced uncertainty in its trade with North American through the new accord that updated NAFTA. Mexico also improved its trade access around the Pacific Basin via the CPTPP trade agreement.

Chile and Peru are in the process of ratifying that accord as well. Chile, Colombia, Mexico and Peru established the Pacific Alliance in 2011 and are gradually developing that arrangement to improve their market openness and mutual trade integration. And, there are other deals in the works.

Some reform-oriented LatAm countries are tacking trade impediments, not only at the border but also behind it. The OECD is helping countries such as Chile, Colombia, Costa Rica and Mexico to advance regulatory and other reforms through such means as independent policy assessment, performance tracking and peer review. Progress has not always been smooth but the economic potential is gradually being unlocked.

Argentina and Brazil have large domestic markets. Via Mercosur, they benefit from mutual preferential market access in an accord that also covers Paraguay and Uruguay. But, further trade openness achieved via high-standards accords including with partners in Asia and beyond could provide an added boost.

Trade with dynamic markets in Asia is already providing LatAm with growth opportunities. Success in the LatAm trade reform agenda may reinforce this development and ultimately contribute to improved economic welfare.

First published 3 August 2020

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