The Case for Faster, Deeper and Wider Latin American Integration

Latin America has demonstrated many examples of economic and political development in recent decades. However, compared with other examples around the world, Latin America has been less bold than it could be, and this is risking a generational opportunity to transform the region.

Historically, the primary strategy across Latin America has been to focus on trading with larger markets, such as the United States, China and Europe. However, for a variety of reasons its members have never competed directly for export leadership of any major industrial segment such as manufacturing (against China and other South Asian nations), technology, services, energy, transportation or others. Instead, the region’s member states remain excessively dependent upon agricultural and mineral exports and trails leading countries in these too.

In truth, Latin American countries are more noteworthy as competitors with each other for global customers than as regional trading partners. In many ways, this trend is moving in the wrong direction. China’s rapidly growing influence in Latin America being a chief issue.

Economic and even political integration has been a dream of many for decades now and overall support has been high. The region has made progress with institutions like the Pacific Alliance and Mercosur. However, after 9 years of development the Pacific Alliance still only has 4 full members with dozens of associate members and observers. The presence of competing trade blocks is both an obstacle to success and a clear sign of the divides within the region. While members of the two institutions account for over 90% of the region’s GDP, the actual trade, potential trade and cooperation between them was never going to ensure that its current membership would be a transformative model that would encourage deeper integration.

Latin America would benefit from a much bolder approach to increasing interregional trade and integration. There are many factors which appear to make that difficult today. Skeptics point out many reasons the region does not trade more. Latin America does not have dominance in industries which benefit from highly optimized supply chains. Electronics and semiconductors in Asia are an excellent example of this. Taiwan’s semiconductor exports are over $100B USD. This did not happen solely because of Taiwan’s limited advantages and economic strategy. It is a critical part of a regional ecosystem that has been a huge economic driver for many of its neighbors and trading partners.

By contrast, in agriculture and minerals, many Latin American countries compete with each other for their main exports which are dependent on geography and climate instead of economic or developmental factors.

Infrastructure in many of these countries and especially between these countries is underdeveloped. With much of the investment and development going to ports and transportation to those ports for the current slate of exports to global markets.

There is a lot of truth to these arguments. Latin America is simply not France and Germany in the 1950s. However, challenges to Latin American are largely outcomes of economic policy not inherent limitations. The best way to compete globally in more industries and, especially, higher global added industries is with greater trade and economic integration. Greater integration will increase regional supply chain opportunities which will spur developments in the types of infrastructure the region needs.

The benefits of this integration would be transformative to the people on Latin America. It would produce much more job growth than NAFTA did. NAFTA has had a positive effect on overall economic growth but led to disappointing job creation. During the run up to NAFTA, Mexican proponents simply oversold the effect NAFTA would have on jobs. The results have been due to the over representation of assembly and manufacturing investments in Mexico. These jobs have and will remain relatively easy to automate and that trend will continue.

There are a lot of barriers to faster and deeper integration among Latin American countries. Public opinion is largely on their side and they should act more boldly. Many localized special interests will be harmed in the process. That is natural, inevitable and, in many cases, beneficial in the long run. Integration will not accomplish its transformative potential unless the individual member states adopt entirely new economic development strategies. Greater trade layered on the current strategies will lead to disappointing results. The reality of this is a chief reason for the slow pace of development. Incrementalism is not a virtue.