Hopes for positive effects of nearshoring in Latin America are high: The Inter-American Development Bank expects the region to benefit in the short and medium term. But for this to happen, governments must create the right conditions.
by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung
Increasing environmental concerns, the pandemic, trade disputes between the U.S. and China, and Russia’s recent invasion of Ukraine have shaken up value chains around the world. Companies in industrialized countries are considering locating their suppliers closer to home.
According to estimates by the Inter-American Development Bank (IDB), nearshoring in Latin America and the Caribbean could lead to additional exports of goods and services worth $78 billion annually in the short and medium term. This applies above all to the automotive, textile, pharmaceutical and renewable energy sectors.
This would be an important tailwind for Latin America, because integration into global value chains increases the productivity of the local economy through technology and knowledge transfer and creates high-quality jobs. If a country increases its global integration by 10 percent, per capita GDP increases by 11 to 14 percent, the IDB estimates.
But the states, for their part, must do something about it in order to become an attractive alternative to locations in the Far East.They should invest in improvements to the business climate and the capacity of investment and export promotion agencies. The IDB estimates that every dollar invested in investment promotion results in nearly $42 in foreign direct investment.
Improving transportation and logistics infrastructure is critical in the short term: the IDB estimates that a 10 percent reduction in international transportation costs increases the value of exports by at least 30 percent.
In addition, the region needs to deepen its regional integration: The 33 existing bilateral and -regional trade agreements between North and South America alone should be harmonized. This alone would lead to an increase in intraregional trade of almost 12 percent.
If we look at the potential calculated by the IDB for the individual countries of Latin America, the largest increases in relation to the size of the economies will occur in Mexico, Central America and the Caribbean. The process can already be observed now: In fact, U.S. investment in Mexico in 2021 tripled from the previous year. Even during the pandemic, foreign direct investment barely declined.
But otherwise, the reality of foreign investment so far looks quite different. According to the latest surveys by UNCTAD, the World Conference on Trade and Development, foreign direct investment increased by 56 percent in Latin America last year, but by much more in South America: by 74 percent. They have thus neutralized the 45 percent decline in the first pandemic year 2020.
This is because foreign companies are investing primarily in raw materials, energy and local markets. Brazil in particular has increased its foreign investment by 78 percent. This puts it in sixth place on the list of countries in which foreign corporations have invested the most worldwide. Mexico continues to rank 10th, but is stagnating.