In 1990, the gross domestic product (GDP) of Latin America stood at $1.18tn — more than triple China’s $361bn GDP. Now, the tables have turned, with China’s $14.3tn economy nearly three times the size of Latin America’s $5.72tn in 2019.
As complex global supply chains emerged in the 1990s and 2000s, they were quickly embedded in Asia, turning China into the ‘world’s factory’ while skipping over much of Latin America.
Today, however, the combined effects of the Covid-19 pandemic and the US–China trade war are battering the supply chains behind Asia’s rise, and Latin America is eyeing an opportunity to close the gap that has emerged over the past three decades.
With US tariffs cutting into revenues and Covid-19 disruptions highlighting the risks of relying on single suppliers, companies are looking to supplement or even relocate their Chinese operations, and some of them will likely opt for Latin America.
“In 2019, exports from China to the US decreased by $90bn,” explains Martín Ibarra, a Colombia-based lawyer focused on international trade. At the same time, “countries like Mexico, Colombia and the Dominican Republic increased their exports to the US”, taking advantage of their weak currencies and free trade agreements to reduce costs.
Costs have also risen in China: “In the last 10 years, you have the revaluation of the yuan, you have the increase in labor costs and you have the trade war,” Mr Ibarra says.
Back to the Americas
The US government is actively working to shift supply chains. Mauricio Claver-Carone, the Trump administration’s top Latin America adviser and the president-elect of the Inter-American Development Bank, is leading these efforts.
“I think one of the things we learned from the pandemic,” he tells fDi, was “that really the most successful experiences that our companies had in regards to dealing with critical supply chains were those that went north to south, definitely not east to west.”
In order to encourage north–south supply chains, Mr Claver-Carone masterminded the ‘Back to the Americas’ initiative, a new US programme that aims to channel funds from the Development Finance Corporation (DFC) towards companies moving from Asia to Latin America.
He says that US relations with its Latin American neighbours like Mexico, though imperfect, remained “leaps and bounds better than they were with Asian countries and China, really, in particular”, and that this close relationship can help keep supply chains moving.
He recounted how direct cooperation with the government of St Kitts and Nevis ensured factories critical to the ventilator supply chain stayed open during the country’s lockdown.
“Due to our relationship and due to our friendship, due to our ability to pick up the phones, we were able to really make a difference and ensure that companies... had the PPE or the supplies they needed to keep their operations ongoing, to ensure that the chain kept moving,” he says.
Last month, the Colombian government launched an initiative to attract multinationals from Asia, with investment promotion agency ProColombia identifying 536 potential candidates with a previous footprint in Colombia. Of those, 31 showed interest in relocating.
Colombia’s efforts are a preview of how Latin American governments will cooperate with the ‘Back to the Americas’ initiative, identifying viable candidates for relocation and then referring them to the DFC.
Latin American countries are “going to have to make an attractive sales pitch in themselves”, Mr Claver-Carone says, “and then with our DFC and other agencies of the US government, we can help finance or incentivise, like Japan did, initial relocation costs”, referencing Japan’s $2.2bn programme to cover the relocation costs of firms moving out of China.
Central to their sales pitches will likely be free zones, which Latin American governments have used for decades to lighten regulation and upgrade infrastructure. Now, motivated by the trade war and the pandemic, Latin American free zones are presenting a united front to attract companies moving from Asia.
The Association of Latin American Free Zones (AFZA) recently launched Relocate Latam, a website it calls Latin America’s “first specialised platform for the reshoring, nearshoring and offshoring”. The website aggregates photos and information from free zones and industrial parks in 15 countries, allowing prospective tenants to research and contact potential sites.
Maria Camila Moreno, the executive director of AFZA, said that they had thought of the initiative years ago, but had dismissed it as unrealistic, explaining that it was only because of the Covid-19 pandemic that competing free zones were willing to come together as part of a regional initiative.
“With Covid-19, it was like, boom — like a rocket — and we started asking the different free trade zones to give us information, to give us their warehouses, land logs and space available.”
Despite new levels of commitment and cooperation to promote nearshoring, Latin American countries face difficulties as they try to attract industries that have been based in Asia for decades.
“If you want to bring a cluster or to bring a Chinese company, you need to bring them all — at least 50 companies — because Chinese companies are not going to come alone,” explains Ms Moreno, with producers struggling to leave behind the supplier ecosystems supporting them in Asia.
According to Álvaro Mendez, the co-director of the LSE Global South Unit, that might be difficult: “For Latin America to be successful with nearshoring, they have to have certain capacities that they don't necessarily have at the moment.”
“I think one of the main reasons is the fact that governments are not thinking about the long term,” he says, with political leaders focused on re-election. “The sort of infrastructure and sort of investment that is needed requires someone else to cut the ribbon.”
Jimena Blanco, the head of Americas at risk consultancy Verisk Maplecroft, stresses that Latin American countries have different capacities, with some able to compete with Asia while others still lack necessary capacities.
She says that Mexico, Colombia, Panama and Costa Rica can match south-east Asia’s low costs and high human capital, but the “Northern Triangle” countries of Guatemala, El Salvador and Honduras struggle with low human capital and security concerns.
“It's not Latin America as a region,” she says, “but rather companies evaluating opportunities in individual countries within the region that will determine whether they reshore to Latin America or not.”