The Push for Increased Intraregional Trade in Latin America

The Push for Increased Intraregional Trade in Latin America

Latin American economies are stalling. Shannon O’Neil, an economic policy expert at the Council on Foreign Relations, reported that over the last 30 years, Latin American economies have become less diverse regarding what they produce. The region’s industries export goods at comparatively lower rates than Europe and North America and are overall less productive. 

Shannon O’Neil, the senior vice president of the Council on Foreign Relations, has argued that the region is often outcompeted on the global stage. NAFTA—a free trade agreement between the US, Canada, and Mexico—devastated employment in the latter, as US-subsidized products wiped out small agricultural businesses in Mexico. 4.9 million Mexican families were displaced. Those in Europe and Asia have lapped Mexico, Brazil, and Argentina as their growth remains stagnant. As such, O’Neil holds that international trade has proven empirically unsuccessful for Latin American countries and has turned to encouraging intraregional efforts instead. 

Present-day internal trade policy in the region is weak. Economic exchange within the Latin American bloc is 40% less than the EU and 26% less than North America. While there are over 12 multilateral trade organizations within Latin America, little has changed on the ground. Existing trade agreements are lacking – experts at the Georgetown Americas Institute have explained that strict manufacturing rules and entirely missing trade links throughout Latin America have rendered the region uncompetitive. Georgetown Americas Institute (GAI) resident fellow Antoni Estevadeordal argues the continent must unify these links and focus on aligning disconnected manufacturing laws to reverse the situation. The Inter-American Development Bank (IDB) warns that imminent change is necessary, as these agreements face a slow death in the face of major deals already in place in Europe and North America. 

World Bank Senior Transport Economist Gödze Isik confirms that strengthening intraregional trade is Latin America’s path to economic growth. She contends that regional integration is vital in diversifying economies away from a reliance on just a few products. Latin America may finally seize this opportunity through the newly proposed LAC-FTA or Latin American and Caribbean Free Trade Agreement. Such an agreement, driven mostly by tariff elimination, could add $11 billion in annual trade flows by blending the region’s 33 separate agreements into a single regional free trade bloc. The Inter-American Development Bank has predicted that an LAC-FTA would mitigate the negative impacts of global trade frictions by 40%

Further bolstering the push for Latin American regionalism is a fear of dependency on China. China’s presence in Latin America has grown rapidly. As of 2023, Beijing surpassed Washington as the region’s largest trading partner. China’s position in the region has raised concerns about potential debt-trapping, especially by the US. China has loaned over $137 billion to Latin American governments (often in exchange for oil) and is a voting member of multiple Latin American banks. Diana Roy, an expert at the Council on Foreign Relations, explained that the region’s dependence on China has ‘the potential to push countries into cycles of debt that result in an inability to pay back massive loans.’ This is not simply a theory – Latin American countries have experienced Chinese debt trapping in the past. In 2009, Venezuela entered an unfavourable iron extraction agreement with China, which they could not fulfill. As a result, Venezuela owed the country approximately $1 billion. Worse, this treatment is not specific to Latin America, either. In July 2017, Sri Lanka could not repay a Chinese loan. As an alternative to payment, China forced the Sri Lankan government to hand over a 99-year lease of its Hambantota port

Aside from loans, reliance on Chinese demand is risky. Latin America’s exports to China are specialized, focused mostly on oil and mining, undermining market diversity. There are already fears of such dependency in countries like Chile, which sends more than 38% of its total exports to China. The European Parliament’s policy department released a report arguing that the export-dependent economic model tends to run into difficulties in the case of China and LACs. The report explained that such an approach often causes commodity prices to stagnate and growth to slow. This occurred in the 2010s when Latin American countries achieved growth far below the global average. 

Andrés Cadena, a senior partner at the McKinsey Center, concludes that the solution to long-awaited economic prosperity is internal. Latin America has remarkable strengths—a large population, enormous reserves of minerals, energy resources—all it must do is look regionally to realize its growth.

Edited by Olivia Moore

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