World Economy

LatAm Needs More Asian FDI, Trade

LatAm Needs More Asian FDI, Trade LatAm Needs More Asian FDI, Trade

Latin America is firmly on the economic radar of Asia in the post-global financial crisis world economy. Both Asia and Latin America have grown faster than the world economy.

During 2009–2013, annual average growth was 4.6 percent in Asia, 2.4 percent in Latin America, and 1.9 percent for the world economy. Trade between the two regions has grown significantly, reaching a historic high of over half a billion dollars in 2014, China Spectator reported Monday.

This figure is projected to increase to $750 billion by 2020. Increased trade has prompted a flurry of diplomatic activity. In July 2014 the President of the People’s Republic of China (PRC), Xi Jinping, visited Argentina, Brazil, Cuba, and Venezuela. Shortly afterward, Japanese Prime Minister Shinzo Abe visited Brazil, Chile, Columbia, and Mexico. Pledges of trade, foreign direct investment (FDI) and foreign aid accompanied these high-level visits.

  Trade Growth

This represents a dramatic turnaround. Before the 1990s, there was little trade between the two regions. Transport connections between these geographically remote regions were poor and trade barriers were high, resulting in few cultural, diplomatic, and business ties.

Several factors underpin recent trade growth between Asia and Latin America. First, falling trade barriers have fostered specialization according to comparative advantage with land abundant Latin America exporting commodities in return for manufactured goods imports from skilled labor abundant Asia.

Second, strong demand for Latin American commodities and food from China and other Asian economies has provided an alternative to declining markets in industrial economies, particularly since the global financial crisis.

Third, Latin America has a significant and expanding regional market for Asian industrial goods and FDI. Fourth, advances in information and communication technology as well as better logistics have supported inter-regional trade.

Fifth, the spread of free trade agreements (FTAs) across the Pacific has supported market access, rules-based trade, and business confidence. The number of FTAs has grown from 2 in 2004 (Republic of Korea-Chile and Taipei, China-Peru), to 9 in 2007, and further to 22 in 2013. But much needs to be done before Asia and Latin America can reach their full trade potential. The Asia-Pacific Economic Cooperation (APEC) forum is a useful institution for creating business confidence, but few Latin American economies are in APEC. A newer institution, the Forum of East Asia Latin America Cooperation (FEALAC), agreed in August 2014 to set up a business body to promote cooperation in trade and investment. Brazil, Latin American’s largest economy, especially needs to strengthen ties with Asia, but currently has only one FTA with Asia and concerns have been expressed about its protectionist tendencies. Another key player could be Argentina, if it can sort out its financial crisis and escape going into default.

  Asian FDI Lagging

Asian FDI can help transform Latin American economies. Asian firms can provide valuable capital and expertise to upgrade Latin American infrastructure.

Technology transfer and marketing connections from Asian firms can foster Latin American firms joining global value chains and promote internationally competitive industrialization. Small and medium-sized enterprises (SMEs) in both regions can benefit as suppliers, subcontractors, and service providers to multinationals.

However, in contrast to growing trade between Asia and Latin America, FDI has remained lackluster during the past decade. The annual average greenfield investment from Asia to Latin America between 2003 and 2013 was $14.1 billion, while that of Latin American to Asia was only $1.2 billion. Firms from Asia’s major economies — Japan, the China, and the Republic of Korea — account for the bulk of Asian investment into Latin America and such investment reaches a broad range of economic sectors in Latin America, including automotives, machinery, electronics, metals, chemicals, petroleum, and food and tobacco.