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Talking Trade blog

Latin America: A key stakeholder in Asia Pacific trade?


Published 27 January 2022

Over the last year a lot has been said about the implications of RCEP’s entry into force, CPTPP’s expansion through the potential accession of the UK, China or Taiwan and the negotiation and entry into force of digital economy agreements like the Digital Economic Partnership Agreement (DEPA).

However, often overlooked from the analysis are the implications of the increased engagement and participation of Latin American countries in some of the region’s most important economic integration efforts.

Last year alone, multiple Latin American countries have either formally asked to join or began to implement agreements with Asia-Pacific partners.

In July 2021, Peru became the eighth and latest country to ratify the CPTPP, an agreement that also includes Mexico and Chile as signatories.[1]

In September 2021, Ecuador filed its application to join the CPTPP.

In September 2021, Chile made a formal request to join the ASEAN Australia New Zealand Free Trade Area (AANZFTA).[2] Chile is also one of the three founding members of the DEPA agreement, which aims to update trade rules and facilitate trade for the digital economy.

In January 26 2022, the Pacific Alliance, a regional economic bloc comprising Colombia, Chile, Peru and Mexico, signed an Associate agreement to add Singapore.

The list above is not exhaustive and excludes an existing and growing network of bilateral FTAs between Latin American and Asia-Pacific economies.

Countries like Chile and Peru already have in place FTAs with multiple markets in the region like China, Korea, Thailand and Australia. Countries like Colombia, Ecuador and Costa Rica, which to date have had few or no FTAs with countries in Asia, are making serious attempts to deepen their economic relations with the region. For instance, Ecuador, a country with almost no FTAs in place, is actively trying to expand its FTA footprint through 10 new FTAs over the next four years.

Latin America represents 8.3 percent of the world’s population and 6 percent of the world’s GDP (USD 5.61 trillion). Given the potential of deeper economic engagement and integration between the two regions, it is important to consider both the drivers and implications of increased interest and engagement by Latin American countries in key regional economic integration efforts.

There are three key factors that can broadly characterise the move towards deeper economic engagement between the two regions.

First, most Latin American economies rely heavily on oil and gas, mining and agricultural production and exports. This has made them particularly vulnerable to changes in world commodity prices.

Second, the U.S., the region's main trading partner for most of its history, has become an inconsistent and less reliable partner.[3] As discussed in previous Talking Trade entries, the past U.S. administration put in place a raft of terribly confusing, unclear or contradictory trade policies, and the new U.S. administration has not outlined or set a clear and cohesive trade agenda. Leaders of countries like Ecuador have stated that the Biden administration has shown little interest in advancing new FTAs with the region.

Third, the shift away from reliance in the U.S. market has been exacerbated by increased investment and trade with China. For markets like Peru and Chile, China now represents 30 percent and 32 percent of total trade respectively. Chinese investments in new projects in Latin America rose from 4 percent between 2005 and 2009 to 6.8 percent over a five year period ending in 2019.

As a result of a lack of a diversified export basket, a shift away from the U.S. as the key trading partner and growing economic relations with China, many Latin American countries are turning to the Asia-Pacific to diversify their export baskets and trade and investment partners.

In addition to playing a key role in transformative agreements like the CPTPP or DEPA, Latin American countries have taken other decisive steps to strengthen economic ties with Asia-Pacific partners. 

For example, since its inception in 2011, the Pacific Alliance has garnered a surprising amount of attention from around the world: 59 countries have flocked to become observers and six countries are in the process of negotiating trade agreements with the PA member in order to obtain Associate State status.[4]

While all the efforts and initiatives highlighted in this blog provide an optimistic outlook for deeper and more meaningful engagement between the two regions, there remain key political, institutional and economic obstacles that may be detrimental to the continuity, relevance and eventual impact of Latin American engagement with the Asia-Pacific. 

First, most of Latin America is not a highly integrated economic region. It still needs to overcome structural obstacles that prevent it from developing value and production chains that could make the region a more attractive partner for Asia-Pacific counterparts. For example, trade between Pacific Alliance members has remained between 3% and 4% over the past decade. Poor regional integration is the result of a lack of complementary export baskets and challenging geographical conditions and poor transportation infrastructure have remained large obstacles to regional trade.

Second, potential ideological changes in heads of state often lead to significant shifts in domestic trade policy. For example, Ecuador, which is pursuing an aggressive trade agenda under President Guillermo Lasso, had in place more protectionist measures with few trade agreements under the government of Rafael Correa (2007 - 2017).  

Similarly, newly elected presidents in both Peru and Chile, both of whom won on progressive and socially inclusive platforms, have expressed skepticism towards FTAs. Chile, in particular, is likely to radically alter its approach to negotiating and ratifying FTAs after it concludes an ongoing Constitutional Reform. Upcoming elections in both Colombia and Brazil have also added uncertainty about the region’s future economic policy.

The participation and engagement of Latin American countries in multiple economic integration efforts within the Asia-Pacific means that they will become partners and stakeholders in the development of a regional trade infrastructure that has the potential to create more open, resilient and inclusive trade outcomes in a post-Covid environment. However, increased political uncertainty and structural obstacles will determine the depth, importance and impact of that role.

***

[1] In Peru, the agreement entered into force on September 19, 2022 following an Executive Issued decree. Chile remains one of the three countries that have not ratified the CPTPP.
[2] The AANZFTA is an agreement between Australia, New Zealand and the 10 members of the Association of SouthEast Asian Nations (ASEAN). The agreement has been in force since 2010. Members are participating in negotiations to upgrade the Agreement expected to conclude in September, 2022.
[3] Many key Latin American economies like Colombia, Chile, Mexico and Peru all have FTAs in place with the U.S.
[4] The Pacific Alliance has signed an agreement with Singapore and launched negotiations Australia, New Zealand and Canada. Korea and Ecuador are candidates to become Associate States.

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Sebastian is an international trade and development adviser with extensive hand-on experience working across business, government and academia in the design and implementation of trade strategies and policies.

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