A recent Inter-American Development Bank report, Trade Trends Estimates: Latin America and the Caribbean 2020, reveals that the value of exports from the region contracted by 2.4% in 2019 after two years of robust growth.
The report forecasts that the downturn in exports will continue in the coming months due to slowing global demand, volatility of commodity markets, and uncertainty about global trade tensions.
To explore these findings in more detail and get a better sense of trade trends for 2020, we interviewed Paolo Giordano, Principal Economist at the IDB’s Trade and Integration Sector, who coordinated the report.
Can you describe the latest trends in Latin American trade?
Last year marked a change in trend. The region´s exports entered a contraction phase, dropping an estimated 2.4%, in contrast to the 8.7% expansion in 2018 and 12.2% in 2017. The impact was most marked in South America, where exports contracted by -7.2%, and in the Caribbean (-10.9%). In Mesoamerica, exports continued to grow, but at rates significantly lower than in 2018. For example, shipments from Mexico grew only by only 3.3% in 2019, compared with an increase of 10.1% in the previous year. Exports from Central America expanded by 1.5%, half the rate recorded in 2018.
Imports also fell by 3.1%, primarily as a result of the downturn in economic activity in some of the largest countries in the region, such as Argentina and Mexico, and the indirect impact of the downturn on export demand.
Why did exports contract?
There are two main, interconnected reasons. First, the drop in commodity prices, particularly those of extractive products such as oil and copper, but also of agricultural products, starting with soybeans and coffee. And second, the stagnation of export volumes, which grew just 0.3% in 2019, compared with a solid 4% in 2018.
This coincided with a change in the demand patterns of the main buyers. China, which has long been the driving force for exports from the region, went from increasing by 25% its imports from Latin America in 2018 to a 2.3% contraction in 2019. This represents a major change for our countries. The United States thus became the only driver of exports from the region, with a 1% growth in 2019, while demand from the European Union continued to contract (-7.0%) and intraregional trade fell by 10.8%.
How is intraregional trade in Latin America and the Caribbean behaving?
The downturn in trade between countries of the region was decisive in the overall contraction of exports. Intraregional exchanges declined within virtually all Latin American integration schemes, except for Central America, and between countries belonging to different blocs. For example, Peru´s exports fell to both the Andean Community and the rest of Latin America.
The drop in intraregional trade was particularly marked in South America. Because of its weight, Brazil was the one that affected the result the most. Its exports to the rest of South America fell 23.7%, mainly due to the economic crisis in Argentina.
What are the prospects for exports from Latin American and Caribbean in 2020?
In quantitative terms, there are still no signs of a change in the trend in the coming months, according to a new model that allows us to forecast the intensity of trade flows in the region in real time.
In qualitative terms, we can foresee two somewhat contradictory scenarios for the rest of the year.
On the one hand, there are signs of optimism in the more advanced economies. The truce that the United States and China reached at the end of 2019 suggests that trade tensions should not continue to escalate, although uncertainty persists about its impact on the region. China has committed to increasing its purchases from the United States but may end up importing less from Latin American countries to achieve this goal. For its part, in some countries of the European Union business sentiment is improving, although uncertainty still persists about the effects of the United Kingdom’s exit from the European Union (Brexit).
On the other hand, there are ongoing risk factors for exports from Latin America to some emerging economies, starting with China, which last year experienced its lowest ever economic growth in the last 30 years. This structural trend poses a major challenge to Latin America’s export performance. China is also experiencing the outbreak of the coronavirus, which could lead to a reduction in its economic growth and therefore have a negative impact on Latin American exports.
Finally, the reversal of the trend in intraregional trade will depend on how quickly the region returns to the path of economic growth, starting with its largest economies: Brazil, Mexico, and Argentina.
How can countries reverse the current contraction?
From a long-term perspective, this is the third time Latin American trade has contracted since the 2008 global financial crisis, during which trade has increased much less than in previous decades. The risk for Latin America is to settle in a regime of low trade dynamism, just when more solid and inclusive growth is much needed.
Therefore, it is imperative for countries in the region to put trade competitiveness at the core of their development policies, as argued in the latest IDB flagship report. The current context highlights the need for reforms and investment to facilitate trade, reduce the cost of logistics, promote the diversification of the export supply of goods and services, and attract foreign direct investment.
Trade Trend Estimates: Latin America and the Caribbean 2020 is available for download here.