SPECIAL REPORT—Over the last decade, much of Latin American growth was supported by strong international demand, especially for natural resources and minerals. And over time, China became a more important commodity customer, which boosted world prices. However, as the global economy has slowed in recent years, Chinese demand for natural resources also has decreased, while the value of commodities has fallen. This has negatively affected Latin American exports and economic growth.

Measured by gross domestic product (GDP), Latin American economic growth is projected to reach 3.4 percent this year and slowly rise to 3.9 percent by 2018, the IMF says. But factors other than global economics have had an impact.

The region’s transportation infrastructure, as compared to Asia’s, adds to costs and delays. As a result, it has put Latin America at a competitive disadvantage, according to the Peterson Institute for International Economics (PIIE). In fact, Latin America’s poor infrastructure has prevented it from taking full advantage of various free trade agreements signed in the last 15 years, PIIE reports. What is the effect?

The average Latin America tariff has been reduced from 35 percent in the late 1980s to approximately 8 percent in 2012, PIIE estimates. This has spurred global economic integration and led to faster growth in recent years. However, if trade delays were translated into a tariff or tax, the percentage would reach nearly 9, PIIE says. In turn, poor quality infrastructure may effectively have excluded certain Latin America countries from engaging in higher value-added complex manufacturing that requires supply chains to operate in a time-sensitive environment.

Nevertheless, many countries in Latin America, including Mexico and Brazil, continue to offer U.S. exporters and investors tremendous opportunities.

The Growing U.S.-Mexican Partnership

In 2012, U.S. exports to Mexico reached $216 billion, approximately the same value of U.S. merchandise sold to the entire 27-member European Union, less Germany, according to U.S. Department of Commerce data. Consequently, Mexico is the United States’ second largest foreign customer after Canada.

What’s more, on average, each Mexican consumed $1,860 of U.S. goods. Considering that the World Bank calculates Mexican gross national income per capita at $9,420, this is quite astonishing and reflects a high priority placed on American brands over other country’s products. In comparison, on average, each Brazilian, Chinese and Indian citizen spent $217, $82 and $18, respectively, on American goods last year.

Top U.S. exports to Mexico included computer and electronic products, transportation equipment, chemicals, petroleum and coal, and machinery, the U.S. Department of Commerce reports. In terms of total trade, the United States ran a $61 billion trade deficit with Mexico last year. However, if U.S. imports of Mexican oil and gas are eliminated from the equation, the U.S.-Mexican trade deficit decreases to $24 billion, an amount less than the U.S. trade deficit with Ireland.

Mexico’s large population of 116 million and projected GDP this year of $1.27 trillion will continue to offer U.S. companies plenty of opportunity. And its young population (the United Nations projects Mexico’s median age at 28.3 years in 2015) could be quite beneficial to U.S. producers of products geared toward a younger target market.

NAFTA has had a positive impact in terms of establishing beneficial North-South economic relationships

The North American Free Trade Agreement, implemented in 1994, certainly has had a positive impact in terms of establishing beneficial North-South economic relationships. In fact, stated by the Woodrow Wilson International Center for Scholars in Washington, D.C., “The integration of the United States and Mexican economies has transformed the nature of the bilateral relationship from one of competition to partnership. U.S. jobs, competitiveness and economic growth all have benefited from the nation’s relationship with Mexico.”

In turn, several U.S. industries have come to rely on the assistance of Mexican manufacturers. But that’s not all. “A full 40% of the content of U.S. imports from Mexico was originally made in the United States, and it is likely that the domestic content in Mexican imports from the United States is also very high,” says the Woodrow Wilson International Center. In comparison, 4, 3, and 2 percent of U.S. imports from China, Brazil and India, respectively, are comprised of U.S. original content, the Center notes.

Importantly, Mexico is likely to be a beneficiary of American backshoring, which involves American companies relocating previously offshored production back to the United States from China and other developing countries due to rising costs abroad. This is anticipated to further boost U.S.-Mexican trade in the years ahead, which already supports 6 million U.S. jobs, the Center estimates.

Brazil’s Problems and Opportunities

Following the eight-year rule of President Lula da Silva from 2002 through 2010, President Dilma Roussef has made some policy errors and protectionist moves that have resulted in a less-friendly business environment, some analysts say. And new problems have surfaced recently.

Brazil has encountered what seems like one protest after another focusing attention on a variety of issues. A rise in fees for various services, including bus fare, initially received much attention. This appears to have been followed by demands for better infrastructure and government services, greater government accountability, and the elimination of state corruption. The Brazilian government also has been criticized for the amount of money invested in preparation of hosting the World Cup next year.

In The Spotlight

In response, beginning on June 25, Brazil’s Congress voted on legislation designed to achieve a number of goals—from reducing corruption and crime to improving hospitals, according to The Wall Street Journal. In addition, Brazil’s lower house reportedly approved a bill to dedicate oil royalties to education and healthcare.

Areas for improvement also have been echoed from organizations outside the country. Stated by the World Trade Organization (WTO) in May 2013, further action is required for Brazil to address “long-standing structural shortcomings affecting the Brazilian economy's competitiveness, such as inadequate infrastructure, insufficient access to credit, and high taxes.”

The country’s economic growth is in line with expectations for the Latin American region. According to the IMF, Brazilian GDP is anticipated to reach 3 percent this year and slightly exceed 4 percent by 2018. A decrease in Brazilian exports and the value of natural resources, especially iron ore to China, has had a negative impact on growth and likely will continue to adversely impact the South American country.

When looking at Brazil over the longer term, however, the picture brightens. “Brazil weathered the global economic crisis well, supported by strong domestic and foreign demand and sound macroeconomic policies. Brazil has also contributed to global economic recovery by substantially increasing imports. Solid economic growth and active incomes policies have allowed Brazil to make progress towards reducing poverty, unemployment, and income inequality,” the WTO said.

Few observers doubt the immense potential of Brazil.

Stated by Boston Consulting in an April 2013 report, “Few observers doubt the immense potential of Brazil, one of the world’s most significant emerging economies... It is the largest nation in Latin America, with one-third of the region’s population generating 44 percent of its GDP. Already the sixth largest economy in the world, it could become the fifth by 2020.”

Last year, Brazil imported $43.7 billion in American goods, according to the U.S. Department of Commerce. As a result, America’s seventh largest foreign market generated a U.S. trade surplus of $11.6 billion. The top five U.S. exports to Brazil include chemicals, transportation equipment, computer and electronic products, petroleum and coal products, and minerals and ores.

Over the years, Brazil has received much investment from the United States and Europe. And compared to other Latin American economies, it has a relatively strong manufacturing sector. Plus, Brazil’s population of 201 million is anticipated to generate a sizable $2.55 trillion in GDP this year, the IMF reports. The average Brazilian’s income is $10,720, the World Bank says.

Although many problems persist, moving forward, Brazil almost certainly will continue to be a profitable market for American exporters.

Strategies To Consider

While developing your Latin American global strategic plan, consider the following points:

  1. When selecting which markets to pursue, research various factors, including country growth rates, size of the middle class, government and currency stability, protectionist trends, and labor costs, skill base, and productivity levels,
  2. Understand Latin American demographic trends, including median age and disposable income, and adjust your value proposition accordingly, and
  3. Determine if alliances and partnerships with regional firms will effectively advance your goals.
This Special Report appeared in International Insights, a Fifth Third Bank publication, August 2013.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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