Should Latin America Increase its Intraregional Trade?
As the world becomes increasingly multipolar and regions prioritizing themselves over relations with others, is it time for Latin American economies to do the same?
The landscape right now
Right now, Latin America’s GDP growth rate is 1.6%. Though that number may be double what it was originally projected to be, one thing is abundantly clear: the region has among the lowest growth rates in the world. Compared to the growth of the world economy, which is 3.2%, Latin America significantly falls behind par. And compared to hyper-industrialized regions of the world like Asia, whose growth rate is 4.6% for 2024, Latin American economic policy is fundamentally flawed.
The question is why. Among a litany of factors, including global geopolitics, domestic tensions, corruption, and most importantly, trade, the region has substantial work to do. More specifically, however, Latin America’s intraregional trade as a percentage of total exports is less than 20%. Compare that again to regions like Asia, whose intraregional trade makes up 58.5% of total exports, or Europe, where intraregional trade makes up 61.43%. Internal cohesion amongst Latin American countries is missing.
What problems has a lack of intraregional trade created?
Principally, Latin America’s current trade policy has turned it into an export-oriented economy that is overdependent on major geopolitical players such as the US and China. In fact, a recent analysis from World Integrated Trade Solutions found that over 56% of Latin American exports go to the US and China alone.
The problem comes from the fact that Latin America’s sudden internationalization of trade has forced it to exclusively export raw commodities like crude oil and rare earth minerals to countries like the US and China. Since Latin America is almost exclusively a raw commodity export economy, there is no domestic industry for it to sustain itself. For instance, Chile built its last copper smelter in 1990, with over 50% of its copper sent in semi-processed form to China.
Another problem comes from the undercutting of industry. Because Latin America never took the time to prioritize domestic industry building, it gets undercut by major nations in virtually every other good except those select raw commodities. Countries such as the United States have more advanced production facilities, stronger international trade ties, and the scale to exploit minor nations, meaning that they will always be able to undercut nearly all industries.
To contextualize Latin America’s problem, even the largest economies such as Argentina and Brazil have the weakest trade performance in the region, closing themselves off to virtually every economy besides the United States and China. Now, it’s clear that Latin American economies aren’t doing the best, but is increasing intraregional trade the solution?
Potential benefits of strengthening intraregional trade
The first reason that Latin American countries should consider increasing intraregional trade is to build up infrastructure. Because of the lack of diversity in the goods they produce and the lack of priority countries have for keeping their trade within Latin America, regional infrastructure is incredibly poor. Right now, just one-third of flights in Latin America connect their cities to one another, posing a serious problem for strong trade routes. In fact, it costs two times as much to trade within the region than outside. Absent a concerted effort to prioritize a strong intraregional base, Latin America might continue to suffer in global crises.
The second is to have a stronger safety net. With the world currently shifting to multipolarity and other regions looking within themselves before even considering the prospect of outside trading, Latin America’s overdependent policies might screw them over. Especially with tensions rising between these multipolar regions, Latin America would have no safety net to fall behind on should global trade be disrupted. Luckily, the Inter-American Development Bank speculates that increased regional trade opens up access to a $5 trillion market, and many leaders have shown support for integrated innovation and investment.
Thirdly, Latin America has the possibility to combat its rampant food insecurity crisis. The problem isn’t getting any better, with one in every three people in the region suffering from food insecurity and the food inflation rate being double the global rate. The main reason for this detrimental problem is the fact that export-oriented agriculture is prioritized by Latin American governments, leaving smaller and regional producers without any federal support or subsidies. Since only 13% of Latin America’s food exports stay within the region, over 250 million constituents go hungry. However, prioritizing intraregional food trade could allow for a better support system for all producers and, more importantly, would cut costs severely due to geographical proximity and regional integration. Studies hypothesize that such an action could increase the regional food supply by up to 57%.
Potential negatives
Many opponents of increasing intraregional trade don’t necessarily contest that it’s a good idea in theory, but rather they question the feasibility of that matter.
The first issue with feasibility is, in fact, infrastructure. Even though many supporters of intraregional trade argue that there is an incentive to build strong regional infrastructure, people point to the fact that every regional trade bloc in the past may have promised to build infrastructure but never did. The Andean Community of Nations, the Pacific Alliance, and the Central American Common Market had big ambitions but even bigger problems.
The second issue is with domestic and international divisions. Without all leaders coming to the table and genuinely prioritizing trade and collaborations, Latin American intraregional trade seems like a fairy tale rather than reality. But the future looks bleak: increasing corruption, economic mismanagement, and an influx of Chinese authoritarianism all pose problems requiring these countries to devote all their resources domestically before coming to the table. The bigger problem is that leaders are simply unwilling to conduct dialogue and trade. Ideological divisions on a litany of policy issues currently pose too big of a problem to facilitate trade.
The conclusion
Ultimately, proponents and opponents agree that something about Latin American trade policy needs to change, but they differ on what that may be. However, it’s clear that an abundance of problems exist without any status quo solutions, meaning that if not intraregional trade, Latin American leaders need some other innovative solution.
Sources:
https://www.imf.org/external/datamapper/index.php
https://www.adb.org/outlook/editions/april-2024
https://www.statista.com/statistics/1384794/eu-international-trade-share-imports-intra-extra-goods/