Pan-Latin Currency, Trade Bloc Endorsed

The formation of a pan-Latin American trade bloc, central bank and currency has reemerged as a goal of the presidents of 33 nations in the region, who recently met in Buenos Aires under the auspices of the Community of Latin American and Caribbean States (Celac).

While the formation of a common currency — the “Sur”, or South — would present a Titanic task, movement toward a common tariff regime and a regional central bank could progress relatively soon. The impact of more harmonized tariffs on international trade would be positive, both for global trade with the region and for intra-regional trade.

The consensus for this strengthening of economic cooperation in the region has emerged in part due to the recent re-election of Luis da Silva, known as “Lula”, the left-leaning president of Brazil, the largest economy in Latin America. His predecessor had pulled away from Celac efforts at unification.

In addition to his efforts at warming relations within the region, Lula is revisiting major trading partner countries. He was scheduled to meet President Joe Biden in Washington on Feb 10. He also has called for renewed ties to the EU and to China.

One reason that the Biden administration is keen to strengthen ties to Latin America is competition with China. Near-shoring, or friend-shoring, the practice of transferring manufacturing capacity out of China and into Latin America is a key U.S. policy goal today.

At the Ninth Summit of the Americas, in June, the Biden administration announced it would seek to renegotiate the Americas Partnership for Economic Prosperity (APEP) within the Western Hemisphere. The summit this year included delegations from Argentina, Brazil, Colombia, Mexico and Peru.

Meanwhile, in Congress, Sen. Bill Cassidy (R-La.) and Rep. Maria Elvira Salazar (R-Fla.) proposed The Americas Trade and Investment Act in June, to “prioritize partnerships in the Western Hemisphere to improve trade, bring manufacturing back to our shores, and compete with China.” In oding so, the bill would “unleash the full economic potential of the United States and Latin America.”

The bill would establish a $40 billion borrowing authority within the U.S. Treasury Department and would permit some $5 billion in tax exemptions for U.S. companies that transfer manufacturing plants from China to Latin America.

Latin America and the Caribbean received $142.8 billion in Foreign Direct Investment (FDI) in 2021, 40.7% more than in 2020, but this growth was not enough to achieve the levels seen prior to the pandemic, according to the United Nation’s Economic Commission for Latin America and the Caribbean (ECLAC).

High Import Tariffs Protect Domestic Industry

One key goal of the Celac forum is to facilitate intra-regional trade by removing policy barriers. High import tariffs on finished goods have long been used by governments in Latin America, particularly Brazil, to protect domestic industries from foreign import competition. The import tariff rate in Brazil typically ranges from 10% to 35%, according to Santander.

However the Brazilian government has been on a campaign to reduce import tax to help relieve inflationary pressures. In May 2022, the government announced a 10% reduction in the tax rate for import goods on many products.

High import tax has led many multinational companies, including those in the paint and coatings industry, to establish Brazilian manufacturing bases for key components. Still, the export of Brazilian-made products to other Latin American countries is hampered by the tax rates in target countries.

Overall, import taxes have added to the challenges for local manufacturers in the region, faced with a decade of declining trade levels. “The region’s manufacturing trade deficit has doubled as a percentage of GDP in the last 20 years, during which the share of manufactures in total goods exports has declined in all South American countries,” according to a January report by Eclac.

“In addition, the weak momentum of intraregional trade since the mid-2010s has particularly affected manufacturing shipments,” Eclac notes.

Chemical Industry Trade Strong

While overall manufacturing tends to be isolated across country lines in the region, the paint and coatings industry, as part of the larger chemicals industry, is showing promising signs of intra-regional integration.

“As regards the participation of the chemicals and pharmaceuticals sector in regional value chains, there is significant productive integration among South American countries, especially…Bolivia, Argentina, Colombia, Uruguay and Peru. These countries export a high proportion of their domestic value added to the regional market, and more than half the imported value added incorporated into their exports also comes from the region,” Eclac reports.

“By contrast, the region’s largest economies, namely Brazil and Mexico, as well as Ecuador, exhibit greater productive integration with the United States in both directions,” Eclac adds. “The (chemical) sector’s export propensity averages 12%, which is lower than that of the food, beverages and tobacco sector (at) 16%. Of the countries for which information is available, it only exceeds 20% in Chile and Uruguay,” the group notes.

Currency Imbalances Across Borders

One major limitation to intra-regional trade in Latin America is the wide disparity of the value of individual country currencies relative to the U.S. dollar. The scarcity of available dollars is also an issue for some countries in economic pain, like Argentina, so the creation of the Sur would help two-way trade with close partners like Brazil, without dependence on the scarce dollar.

Currently, the Argentine peso trades at over 36 to one Brazilian real. The peso also trades at over 185 to the dollar now.  And the real trades at just over 5 to the dollar. Thus the Sur would enable Argentina, in particular, to trade more readily with Brazil than does the dollar.

Were a common currency developed, it would represent about 5% of global GDP, or what could be the world’s second-largest currency bloc, smaller than the world’s largest currency union, the euro, that covers 14% of global GDP, according to the Financial Times.

The Sur would be developed in parallel with the region’s existing currencies and evolve into universal acceptance over many years’ time, as did the Euro.

Mercosur Leads Trade Agreements

There are a host of bilateral and multilateral trade agreements in place between Latin American countries and with the rest of the world. Celac, however, is the most inclusive, counting countries that are troubling to U.S. diplomatic policy, like Cuba and Venezuela.

The Mercado Común del Sur, or Mercosur, is the largest functional trade bloc within the region, comprising Brazil, Argentina, Paraguay and Uruguay,   with Venezuela nominally approved for membership. U.S.-Mercosur trade in goods is dominated by China and followed by the United States. In 2022, the United States exported $59.5 billion to Mercosur, while U.S. imports were $40.8 billion.

At the same time, Mercosur-EU trade is also flourishing. “In 2021, the foreign trade balance between the European Union and Mercosur was in favor of the EU by around 1.1 billion euros. That year, exports from the 27 EU member countries to Mercosur countries totaled 44.5 billion euros, the highest figure since 2013,” according to a January analysis by Statista.