ASIA AND LATIN AMERICA: Joining forces
Many hopes for emerging market development hang on a ‘merger’ between Asia and Latin America. But it is easier said than done
When Choongsu Kim waxed lyrical about megamergers late last year, his words caught the mood of investors and public officials across the world. With America facing a fiscal cliff and Europe hobbled by the prospect of an uncontrolled Grexit, the governor of the Bank of Korea (BOK) wondered aloud whether Asia and Latin America, working together, could conjure up a new global growth dynamic.
Asia had failed to decouple from the West following the Lehman Brothers crisis, Kim noted. But perhaps a united LatAsia industrial engine blending the best of both continents could replace the Wests sputtering motor.
Kims words brought nods and mutters of encouragement. Partly this was due to desperation. This was late 2012 and the world was staring into yet another abyss. Asian officials in particular, looking for new and unconventional growth drivers, were desperate to be proactive. In that environment, if youre a Latin American or an Asian policymaker, you cant wave pompoms and claim the future lies in Europe. You need to focus on something else, notes Paul Donovan, global economist at UBS Investment Banking.
For Kim and many others in Asia, the fast growing economies of Latin America notably Argentina, Brazil, Chile, Mexico and Peru appeared most effectively to embody that something else.
Bilateral trade between the two sides accounted for 37% of global gross domestic product (GDP) in 2011. Trade between China and Brazil alone soared 23% year-on-year in 2011, to $77.1 billion, and by an annualized rate of 36% in the decade to end-2010, according to UN Comtrade. But this growth story is not written only by the bigger economic beats: the same year, bilateral trade between each of Malaysia and Argentina, India and Mexico, and Thailand and Peru expanded, albeit often from small bases, by north of 15%.
Moreover, at this stage of development, each region appears to act as a naturally supportive substitute economy to the other. Resource-rich Latin America is vital to the economic wellbeing of resource-poor Asia: the former provides the latter with iron ore and copper as well as key foodstuffs like soybeans and poultry.
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In theory, everyone wins. The two regions possess complementary structures that benefit each other, says Debra Kertzman, director of strategy and policy at the Asian Development Bank (ADB). Asias limited land, water and mineral resources, along with its industrial prowess (and Latin Americas concomitant need for manufactured goods) will, she adds, continue to drive the relationship for the foreseeable future.
But drill down a little and an altogether different picture emerges. First, despite rapid recent growth in bilateral trade, each side is far less directly dependent on the other than bald data would superficially suggest.
Argentinas leading trade partner is still Brazil, just as the economies of Japan and China seem to remain irredeemably joined at the hip. On both continents, business between, say, Chile and Colombia or Indonesia and Japan remain paramount to those nations growth prospects. By contrast, links between most Asian and Latin American nations remain relatively fragile, overwhelmingly dependent on the mass export of a single commodity, such as Chilean copper or Brazilian ore.
One important trend is growing intra-capital flows within the region: Chilean companies investing in Colombia, and Colombian investors placing their money in Panama, says Ramón Aracena, head of Latin America research at the Institute of International Finance (IIF).
Adds UBS Donovan: Asia and Latin America arent important to one another. Quite bluntly, they arent. Latin American growth is important to Latin America; Asian growth is important to Asia.
This process is most visible in terms of the financial mergers and acquisitions market. Global attention was diverted by the $600 million acquisition of the Argentine operations of Johannesburg-based Standard Bank last year by ICBC, Chinas largest lender.
But this deal remains a misnomer. Asian banks have been either absent from Latin America in recent years or, at best, merely passively peripheral players. When Latin American financial assets have been placed on the chopping block, largely as a result of forced deleveraging by struggling European institutions, theyve been swooped on by regional rivals. Two cases in point: the $800 million sale of a large chunk of HSBCs Central American assets to Colombias Davivienda in September 2012, and Chilean lender Corpbancas deal a month later to buy Colombias Helm Bank for $1.28 billion.
And theres another curious phenomenon at work here. Idle assumption would conclude that Latin American resources are shipped east and north largely to fuel Asias economy. Yet thats only half the truth. The reality is that iron ore and copper are shipped to China and Korea to satisfy demand from the slower-growing but far wealthier developed economies of Europe and North America.
Without, say, British demand for ironware and cheap tin trays, China wouldnt import as much iron ore from Brazil, or hire as many people to bang the trays together. Why does Chile export 20% of its goods to China? asks UBS Donovan. Its because all those exports are raw materials that feed factories that produce goods consumed in the United States.
This derived demand process is easy to forget: despite several fallow years, its an inescapable fact that, per capita, America and France remain far wealthier than Brazil and China and should remain so for decades to come. This in turn creates a quandary for those, BOKs Kim among them, who yearn to create new codependent developing market growth engines, consuming vast quantities of high-end goods, literally overnight.
Quite simply, this isnt possible, at least in the short term. We are talking about two very different levels of consumer demand, says Donovan. If you are selling something that is being consumed by an American family earning $47,000 [a year], you arent going to be able to sell the same product to a consumer in [the Chinese province of] Hunan earning $5,000 [per year].
Thats not to say that, given time, a conjoined LatAsia cannot become industrial brothers-in-arms, rather than mere accomplices to extrinsic derived demand. But to get there, commerce between the two sides must become more diverse, creating greater value for all producers and mirroring trade between any two developed nations. Brazilian exports to China in 2011 totalled $45 billion, 95% of which was raw, unprocessed commodities, according to data from Brazils foreign trade ministry. By contrast, more than 99% of the $33 billion-worth of exports China sold into Brazil that year were in the form of finished manufactured goods.
Rebalancing this relationship wont be easy. For one thing, China wants to sell more, higher-value manufactured goods into the region (Chinese imports into Latin America have been growing far faster than exports in recent years). China, broadly speaking, needs Brazilian soybeans and iron ore both are vital ingredients fuelling its red-hot economy but not Brazilian-made washing machines or computer code. Notes Jean-Francois Lambert, global head of commodity and structured trade finance at HSBC: The vested interest of Asian countries in Latin America, first and foremost, is to get hold of resources.
Qinwei Wang, chief China economist at London-based Capital Economics and a former policy expert at the Peoples Bank of China, puts it another way. The problem facing all Latin American economies bar Mexico (whose fortunes are more closely wedded to the United States) as they seek to move up the value chain is the eye-watering competition they will meet from Asian manufacturers.
Chinese exporters are very aggressive, says Wang. They are highly competitive, and they keep prices aggressively low. This makes it hard for Brazil or Chile to either sell manufactured goods into China, or to grow out their manufacturing base.
Such imbalances have in recent times led to fears of the return of protectionism. Brazils 2012 decision to hike a tax on new cars containing less than 65% local content was seen as being aimed squarely at Chinese competitors. Politicians in the capital Brasília complain regularly about Chinese state firms dumping loss-making products locally after failing to sell them in depressed Europe. The main risks faced by the region are imposition of capital inflows controls and/or trade barriers if policy is overwhelmed by sustained local currency appreciation pressures, says the IIFs Aracena.
One logical way of ensuring the free and fair flow of trade between both regions is to set up free trade agreements (FTAs), though again here opinion is divided. Kertzman at the ADB believes bilateral deals would promote increased trade between the two regions; others doubt whether such agreements are even necessary. If there is a willing buyer of soybeans, like China, and a willing seller, like Brazil, what will an FTA really accomplish? asks HSBCs Lambert.
Some countries have pushed ahead with their own bilateral deals: Thailand and Chile will finalize their own two-way FTA this year, focusing on everything from steel to viticulture. Such a deal involving Brazil and China seems unlikely in the short term. Brazil would need to open its markets fully to Chinese exporters; Beijing in return would need to sack thousands of often-obstructive state purchasing agents, employed mostly to act as an effective non-tariff barrier.
Barring unforeseen calamities, combined Latin America-Asia trade will continue growing strongly for years to come. Relations may be strained at times, but both sides need each other: Latin America, the worlds farmhouse, is increasingly dependent on Asia, the worlds workhouse, and vice versa.
The question now becomes where both go from here: what single factor will lead to a new surge in bilateral trade? The answer, rather ironically, is likely to come not from decisions made in Beijing or Rio de Janeiro, but in Washington or Brussels.
You will likely see an acceleration of trade as the OECD economies return to economic health, says UBS Donovan. So an increase in Latin American-Asian trade is largely going to come as a result of the resurgence, economically speaking, of the West, and particularly the US and Europe.
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