Latin America from the Asian Perspective

Asia and Latin America are home to several of the world’s fastest developing economies and the two regions have increasingly recognized the need to become more connected as the world grows more globalized. Asia looks to Latin America as a source to feed its development, while Latin America views Asia as a large potential market for its products. With their relatively compatible markets, increased bilateral trade and investment reflect a bright outlook for relations between the two regions. Strong economies in Asia and Latin America have helped create a new crop of investors and expanded opportunities for export beyond the traditional markets of the United States and the European Union.

Summary

To promote dialogue on this dynamic relationship, the Americas Society and Council of the Americas launched its Asia-Latin America Conference series in May of 2006. As ties between these two dynamic regions continue to deepen, AS/COA looks to position itself as the premier policy organization representing Latin America in the relationship. To date, the series has brought together high-level representatives from the private sector, government leaders, and academics from the two regions. The program offers participants an opportunity to examine cross-regional investment and trade relations, and to analyze economic growth. Past speakers have highlighted current and future areas of cooperation, as well as the prospects for improving social and economic development.

AS/COA co-hosted the Pan-Pacific Forum in coordination with the Asia Society in Washington on November 16, 2007. The topic for this forward-looking discussion was Asian perspectives on Latin America. The keynote speakers, Chinese Ambassador Zhou Wenzhong and Chilean Ambassador Mariano Fernández, represented both Asian and Latin American viewpoints. Panelists at the event included Seok Young Choi, minister of economic affairs and trade at the Embassy of Korea; Hiroshi Toyoda, special advisor for Asia at the Inter-American Development Bank; and Mario Tucci, vice president of Tata Consultancy Services Iberoamerica.

With an eye to the Asia-Latin America agenda, AS/COA intends to continue to study the synergies and differences between the regions, focusing in particular on potential avenues for economic partnership. As part of our analysis of the two regions, AS/COA will identify approaches for increased interaction and joint business opportunities.

Over the past decade, the proliferation of trade agreements and a surge in bilateral investment have expanded the two regions’ economic linkages. The World Trade Organization reported interregional merchandise trade of more than $130 billion between Asia and South and Central America in 2006—more than double the $62 billion in merchandise trade between these two regions in 2000.

The increasing importance of Latin America in the trans-Pacific relationship is also evidenced by the decision of the Asia-Pacific Economic Cooperation (APEC), an association of 21 member countries that promotes liberal trade and economic policies along the Pacific Rim, to hold its 2008 annual meeting in Lima, Peru. A member since 1998, Peru is the newest Latin American APEC member. (Chile joined in 1994 and Mexico joined in 1993).

Asia’s growing influence in Latin America has led to an increased Asian membership at the Inter-American Development Bank. With historical ties to Latin America, Japan had, for many years, been the only Asian member of the Bank. In 2005, South Korea earned full membership. China, which has attended annual IDB meetings as an observer since 1991, could become a full member as early as 2008. 

Latin America is a good source for Asia’s agro-industrial and energy demands, while Asian businesses offer Latin America the necessary investment and technology to improve harbors, transportation networks, and other infrastructure projects. Free trade between the two regions has been strengthened through a proliferation of new accords to open markets. Chile, for example, was the first Latin American country to ratify a free-trade agreement (FTA) with China; the agreement entered into force on October 1, 2006. Chile and South Korea also enjoy a bilateral FTA; an agreement is now in force with Japan; and negotiations were recently completed with India. For its part, Peru has signed a deal with Thailand and announced intentions to negotiate trade agreements with China, Singapore, and Malaysia.

In 2006, Latin American merchandise exports to Asia totaled $61 billion, or 14 percent of Latin America’s total trade. That same year, Asian exports to Latin America reached $69.5 billion, but represented only 2 percent of total Asian trade. China continues to look abroad for new economic partners and sources for raw materials such as soy beans, copper, and other agricultural products. According to Chinese statistics, the average annual growth rate of two-way trade with Latin America has been close to 40 percentsince 2000. In 2006, two-way trade totaled over $70 billion, 10 times that of a decade ago and 70 times that of threedecades ago. Zhou stated that China is now Latin America’s third largest trading partner and its largest export market in Asia. From January to September this year, two-way trade reached $73.36 billion, exceeding last year’s total and growing by 43.5 percent year-on-year.

However, China is not the only Asian country whose trade with Latin America has grown rapidly. Minister Choi noted that two-way trade between SouthKorea and Latin America has grown from $18.2 billion in 2004 to $30 billion in 2006. In addition to the trade agreement with Chile, South Korea is currently negotiating a trade agreement with Mexico.  

Although trade between the two regions continues to grow at a rapid pace, it has not yet reached its full potential. Fernández pointed out that one barrier to the emergent trade relationship between the regions is a distinct difference in the way these two areas of the world conduct business. Some forward-thinking plans may help diminish these differences in the future. For example, International Enterprise Singapore’s International Business Fellowship Program, administered by Singapore’s Ministry for Trade and Industry, enables Singapore-based companies to send employees to Latin America to undergo executive training and market immersion programs. The physical distance and lack of direct travel routes between the two regions creates yet an additional obstacle, particularly in light of the upcoming Peru APEC year, but could also be overcome in the future. 

Another avenue for collaboration, the Forum for East Asia Latin America Cooperation (FEALAC), promotes policy, trade and investment, and science and technology coordination among its 30 East Asian and Latin American members. Created by Chile and Singapore in 1998, FEALAC was founded with the goal of bridging the cultural divide between Latin America and Asia, noted Fernández.

According to the Economic Commission for Latin America and the Caribbean, foreign direct investment (FDI) in Latin America and Caribbean reached $72.4 billion in 2006, up from $71.4 billion in 2005 and $66 billion in 2004. Latin American firms are also investing abroad more aggressively, with total overseas FDI exceeding $40 billion in 2006. Historically, China has been the largest Asian investor in Latin America; the region accounts for almost half of China’s total FDI. Predictably, Chinese investment has been primarily in the energy and commodities sectors. In 2004, Chinese President Hu Jintao visited Argentina, Brazil, Chile, and Cuba. During his trip, he promised $100 billion in investment for infrastructure improvements, such as road and rail construction and port improvements. However, China has come under criticism as the full investment commitment has not materialized. At the first AS/COA Asia-Latin America Conference in May 2006, Renato Amorim, then secretary of the China-Brazil Business Council, indicated that the failure of China to live up to these promises had led to a certain amount of resentment among Latin American countries.

Asked about possible explanations at the most recent event, participants offered a number of potential reasons for China’s failure to fulfill its investment commitments, ranging from political instability to the lack of investment protections in Latin America. Minister Choi opined that the region should work to strengthen institutional and legal frameworks, arguing that the lack of institutions supporting the business community makes the region less attractive for FDI. Choi noted, however, that the continued proliferation of trade and investment agreements in the region will help attract additional investment in the future. For his part, Zhou argued that in fact there is a trend toward increased investment in both directions – from Asia to Latin America and from Latin America to Asia – implying that levels of investment are ultimately apt to live up to earlier promises.

Singapore now serves as the second largest Asian source of foreign direct investment in Latin America, with Singaporean investments totaling more than $129 million in Brazil and $556 million in Mexico. India is also working to expand its presence in the region. Earlier this year, Jindal Steel and Power made a large investment to develop iron ore mines and set up a steel plant in Bolivia.

Just as Asian investment serves as an important source of capital flowing into the region, Latin American-based businesses are also expanding into Asia and the Pacific Rim. In April 2007, Mexico’s Cemex agreed to purchase Rinker Group, an Australia-based manufacturer of building materials, for $15.3 billion. Embraer, the Brazilian aircraft manufacturer, has expanded operations to Singapore. 

APEC: Peru Year

The significance of Latin America’s participation in APEC should not be underestimated. Indeed, it was Chile’s participation in APEC that led the country to deeper ties with Asia, according to Fernández. As noted above, APEC will host its 2008 annual meetings in Peru, and the Americas Society/Council of the Americas is working with the Nation Center for APEC in Seattle to organize a “road show” aimed at promoting the Peru’s year as APEC chair to the U.S. private sector. Under Peru’s chairmanship, the APEC meetings will continue to focus on key items from the Australian agenda, such as energy and climate security, structural reforms, and regional integration. However, Peru will also introduce new agenda items, including promotion of small and medium-size enterprises, education, and anti-corruption and transparency.

Peru has chosen the theme, “A New Commitment to the Development of the Asia-Pacific,” for its year as APEC Chair. Some of the main objectives for the year include the promotion of public and private partnerships, the inclusion of representatives of civil society, and the cooperation of international financial institutions.

APEC members are currently studying how to replace the myriad of bilateral trans-Pacific agreements with a single, unifying Free Trade Area of the Asia Pacific (FTAAP). If created, the FTAAP would become the world’s largest free trade area. The economic activities of all APEC member countries account for 60 percent of the world economy, 50 percent of the global trade volume, and 40 percent of the world’s population.

Although this is a long-term objective with a number of obstacles to overcome, momentum for the interregional agreement appears to be gaining ground, and the Bush administration has begun to actively promote consideration of such an agreement. Advocacy for the agreement could benefit Latin America APEC members as well. In contrast to a number of other proposed Asian agreements that exclude countries outside of Asia, such as the ASEAN+3 and the ASEAN+6, the FTAAP would create a trans-Pacific trading block. This could help spur action on other regional or multilateral liberalization efforts such as the Free Trade Area of the Americas or the Doha Development Agenda.

One proposal to begin the FTAAP negotiation process involves taking an existing agreement and building on it with countries willing to move forward. In 2004, Chile, New Zealand, Singapore, and Brunei Darussalam concluded the Trans-Pacific Partnership Agreement (P4). As all four members of the P4 also serve as members of APEC, Fernández suggested the United States, Peru, or other APEC members could join this group. In fact, he said, Washington has recently shown interest in joining the P4 and held preliminary talks on investment.

The outlook is bright for continued economic integration between Asia and Latin America. In its effort to promote the emerging ties between Asia and Latin America, AS/COA plans to play a bigger role in APEC over the coming year and to advocate on behalf of the forum’s Latin American members. As part of this initiative, AS/COA will set up forums to promote best practices and identify ways to increase trade and investment between the two regions.