Latin America is in danger of being ignored in the reorganisation of global value chains – and at the same time of moving further away from Europe
by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung
In recent months it has become clear that global supply chains are being reorganised. This is linked to the pandemic, according to which companies and countries alike are becoming more autonomous in the future and no longer want to expose themselves to the risk of supply if a link in the supply chain fails. In addition, the intensified conflict between the US and China is leading to the creation of parallel supply and technology chains around the world to reduce the US dependence on China as the world’s industrial supplier.
The first question is to what extent Latin America can benefit from these changes. To anticipate the answer: Probably little.
The Economist Intelligence Unit has just published a short study (“Will Latin America take advantage of supply chain shifts?”). It concludes that Latin America is likely to be ignored by investors when it comes to nearshoring. The infrastructure in the region is too backward, companies are not sufficiently prepared for high-quality production (“Industry 4.0”), the workforce is insufficiently trained and the framework conditions for foreign and national companies are not conducive to new settlements.
The bottom line is that the EIU states that Chile, Costa Rica, Colombia, Mexico and Brazil are still best prepared to benefit from trends in the global division of labour. The only clearly positive exception is Mexico and possibly parts of Central America, which can benefit from integration into US supply chains by replacing part of Asian imports to the US.
What does this mean for European companies and their interests in Latin America?
Here, too, things do not look any better: On the one hand, the prospects for trade and direct investment by European companies have tended to deteriorate with the pandemic and the severe economic crisis in the region: per capita income has fallen, currencies have weakened, the state as an investor in infrastructure is likely to be absent for years due to the high level of spending during the pandemic.
Added to this is the deteriorating framework for integration, also at the political level. German Chancellor Angela Merkel now stated that she doubted whether the EU trade agreement with the South American association of states Mercosur could still be implemented. The reason, she said, was Brazil’s environmental and Amazon policy.
Until a few days ago Germany was considered one of the most important supporters of the agreement in the EU. Merkel may not have pulled the ripcord, but she has increased the pressure. Possibly to save the agreement.
The lack of response in South America is astonishing. No government of Mercosur member countries responded to the Chancellor’s criticism. In Europe, too, the reactions of supporters of the agreement were rather protocol-like. The conclusion can actually only be one: Even in South America, nobody is really convinced of the agreement at present.
This applies to integration in general: even within the Pacific Alliance (Chile, Peru, Colombia, Mexico and soon Ecuador), the initial euphoria has now given way to disillusionment after barely a decade. At present, no government within the Alliance for more integration is working among themselves.
So it looks as if it is not only Europe and Latin America that have moved apart in recent weeks. Within the continent, too, the states are becoming stranger to each other again.
COVID-19 in Latin America
Development of case numbers in the region
Currently reported cases in the countries