Saved by Diversification
Saved by Diversification
By Marcela Valente
6 October 2008
BUENOS AIRES (IPS) - South America’s tendency towards trade diversification over the past few years may spare the region the worst repercussions from the U.S. financial crisis, unlike Mexico, which will definitely feel the effects, as its northern neighbour absorbs a majority of its exports, say experts.
After the collapse of the Free Trade Area of the Americas (FTAA) and the longstanding impasse of negotiations with the European Union, the countries of South America have strengthened their ties with Asia, and dramatically increased their trade flows with that region, which is growing at a dynamic pace that is expected to continue at least until 2010, according to projections by analysts.
Fuel, nickel, copper, wood, soy and other products from this region will continue flowing to China, India, Vietnam, Thailand and other Asian countries. And while the prices of these commodities have suffered slight drops due to the current financial turbulence, they are still soaring and will not collapse, say experts.
"Of the region’s economies, Mexico’s is the one most closely tied to the U.S., and as such it will be the worst hit by that country’s recession, because 80 percent of Mexican exports go there," Brazilian analyst Uziel Batista, of the Institute for the Integration of Latin America and the Caribbean (Intal), told IPS.
Batista works as an economist in Buenos Aires, specialising in the field of Integration and Trade at Intal, which is the Inter-American Development Bank’s (IDB) unit for the promotion of regional integration and trade.
"Mercosur is in an excellent position to face the crisis," he said, in reference to the Southern Common Market formed by Argentina, Brazil, Uruguay, and Paraguay, with Venezuela currently in the process of accession to become a full member, and Bolivia and Chile as the oldest and most privileged associate members.
The soundness of South America’s main free trade bloc is not only determined by its macroeconomic indicators, which, according to experts, reflect a balanced fiscal performance. "It has highly diversified trade activity, spread over the U.S., the EU, Asia, Africa, and the two largest bloc members, Argentina and Brazil," he noted.
In Batista’s view, Mercosur’s refusal to go ahead with the U.S.-driven FTAA, "far from being a whim, was a very smart decision." He forecast that the current crisis will "strengthen the regional integration of Mercosur, South America, and also of Asia, headed by China."
A study by Chilean economist Orlando Rosales, of the Economic Commission for Latin America and the Caribbean’s (ECLAC) Integration and Trade Division, indicates that Asia, with China in the lead, grew "significantly" as a destination for Latin American exports in the last seven years, while at the same time the U.S. and EU markets became less and less important for this region.
More precisely, while the Asian market for Latin American products continues to grow and shows enormous untapped potential, between 2000 and 2007, the share of the region’s exports absorbed by the United States fell from 60 to 40 percent, and by the EU from 30 to 15 percent.
The subsidies granted by the U.S. and the EU to agriculture — a sector that accounts for most of the exports of South America’s largest economies — forced the region to turn to new markets, as the demand for commodities and food products grew steadily in China and neighbouring countries.
This process is now seen as a safeguard against the blows from the U.S. and from Europe’s leading financial markets.
"U.S.-centred economies, like Mexico and the nations of Central America, will be more severely affected," Rosales told IPS. In contrast, South America, "with China as an important market, will come out ahead," he added.
"Trade diversification has certainly strengthened our economies," the Chilean expert concluded, coinciding fully with his Brazilian colleague.
Rosales said it is hard to foresee the depth of the U.S. recession, and based on that, to project the possible impact it will have on different regions. There will, of course, be repercussions, he added, but because of the current distribution of trade, the impact may be neutralised or not even felt in this region, at least in the short term.
At present, in response to the signals from Wall Street, there was a slight drop in fuel, commodity, and food prices, although prices are still at historic highs.
"China is growing at an annual rate of 10 percent, and a possible slowdown brought on by a drop in U.S. demand may push that growth down to eight percent, which is still very high. But we think it will continue to grow at 10 percent, at least for this year and the next," he predicted.
Batista also deemed that even if demand for Latin American exports falls on account of the crisis, it won’t be dramatic.
"People in China won’t stop eating," the Brazilian analyst said, to illustrate his view that demand from the Asian giant will remain high. Prices may go down a little, but "they won’t collapse," he stressed.
