A version of this article was originally published by Knowledge at Wharton
According to a new report by the Latin American Integration Association -- an organization that comprises 12 Latin American countries, including Mexico and Cuba -- there has been a significant increase in the volume of intraregional trade. "Exports have increased by 31.5 percent and imports have grown by 28.1 percent" during the first quarter of 2008 alone, when intraregional trade grew to about $6 billion.
Several factors are responsible for this new trade dynamic, says the report. On the one hand, the devaluation of the dollar has pushed up most Latin American currencies, inspiring companies to look for new alternatives when it comes to pricing and logistics. Add to this the increase in the global price of petroleum and many basic commodities produced in the region. This trend has provided an opportunity for producers of those commodities to boost their revenues, and it has raised the region's Gross Domestic Product.
Most Latin American countries have more purchasing power and that is turning into a good opportunity for trade. In Colombia, business people, unions, and some state-owned institutions have begun to look more thoroughly at their neighboring markets to identify new sales opportunities in the region.
Experts agree that Colombia has not taken full advantage of the opportunities offered by neighboring markets. "Almost every Colombian business person recognizes today that the Venezuelan market (for Colombian exports) is much more significant than the United States because it involves mostly value-added manufactured goods and products that generate more jobs and development," explains German Umana, a professor of economics at the National University of Colombia. However, he regrets the limited impact that Colombian trade has had on its neighbors in Mercosur -- especially in Brazil and Argentina, the largest members of the trading bloc, which also includes Uruguay and Paraguay.
Confronted with the crisis of a multilateral trading system, the countries of Latin America need to align themselves with alternatives that are sustainable and comprehensive. One of them is the Union of South American Nations, which is backed by the governments of Venezuela, Argentina, and Brazil. Unasur's goal is to promote more opportunities for integration and development among the nations of South America. "There is a political will in these countries," argues Umana. "Brazil, for example, has a position of leadership in South America, and it is important to move in (the same) direction."
Francisco Giraldo, a professor of international finance at Colombia's Externado University, believes that when it comes to strengthening these markets, the main problem is "the political variations and changes in these countries, which lead to too many changes in trade flows." For example, Giraldo notes, two countries may have a good political relationship with each other, under which trade prospers, but when that relationship deteriorates, the first thing that suffers is trade.
Investors in Latin America have awakened to the importance of increasing their presence in their neighboring countries. If the 1990s were characterized by the inflow of European and U.S. investment into Latin America, the last five years will be remembered for the movement of capital among Latin American countries, experts say. Imports, exports and mergers that were unthinkable a decade ago have begun to play a key role in the business environment.
Brazil and Mexico are two of the biggest players in that regard. For example, Petrobras, the Brazilian oil company, has either invested in or moved into most other South American markets. Camargo Correa, the Brazilian cement company, has acquired Loma Negra of Argentina. Votorantim and Belgo Mineira, both mining companies, have acquired Colombia's Acerias Paz del Rio and Argentina's Acindar, thus strengthening their presence in the region.
When it comes to Mexico, the investments of Cementos de Mexico (Cemex) stand out. Cemex is one of the three largest cement makers in the world, with plants in Central America, the Caribbean, Colombia, Argentina, and Venezuela. Another Mexican company following this approach is America Movil, which has 147 million customers in the region and is the leading provider of cellular phone service, with a 65 percent market share in Brazil. Meanwhile Mexichem, the largest chemical and petrochemical company in Mexico, has acquired Brazil's Amanco, Latin America's leading producer of plastic tubing. Mexichem now operates plants in 13 Latin American countries.
For its part, Colombia's Compania Nacional de Chocolates has expanded into Central America, through its Cordialsa division, and Colombia's Casa Luker has acquired Panama's Galletas Pascual. Peru's Alicorp, which belongs to the Grupo Romero, one of that country's largest makers of personal care products, as well as Peru's Grupo Gloria, an industrial conglomerate active in food, pharmaceutical and transportation markets, have been acquiring shares of companies in Argentina, Ecuador, and Colombia.
Colombia has already signed trade pacts with Mexico and Peru, and it aims to deepen its agreements with the Andean Community of Nations, which comprises Colombia, Bolivia, Ecuador and Peru. Luis Guillermo Plata, Colombia's minister of trade, has also said that his government is interested in deepening its trade ties with the nations of Mercosur (Brazil, Argentina, Paraguay and Uruguay). Colombia has already signed a free trade agreement with Mercosur that cuts duties on both industrial goods and some agricultural products.
Although many people agree that there is a strong need to take advantage of these dynamics, business leaders and academics worry about how to address the fact that many countries in Latin America have similar economic structures. Their economies aren't complementary; they compete with one another. Giraldo believes that, especially in South America, this has become the key factor that is limiting trade opportunities.
Nevertheless, Carlos Ronderos, former trade minister of Colombia, believes that this problem also offers an opportunity, provided executives in the region become aware of the importance of creating "clusters," or partnerships that would enable companies to take advantage of the high prices of raw materials on global markets.
According to Ronderos, some Latin American countries can become the key suppliers of raw materials, while other countries can make the transformations that are needed to create value-added products that generate additional jobs and promote further development in the region. Experts say that this next stage in the process could begin soon, judging from the increasing number of Latin American multinationals that are making a major leap toward greater prosperity and regional integration.