By Sultan Ahmed Bin Sulayem, Chairman & CEO of DP World
Free trade agreements were centre stage when leaders met at the South American trade bloc Mercosur’s presidential summit in Paraguay in July. From Uruguay’s negotiations with China, Argentina’s willingness to join those talks, and a full bloc agreement with Singapore, it was clear to me South America is moving quickly to fulfil its vast economic potential. But will these steps create the conditions necessary to equalise the regional trade balance of North and South America? I think South America is about to close the gap.
The signs are bright
South America’s economic potential has been traditionally viewed at a disadvantage to North America’s influence, stable trading partners, and economic diversification. But the past decade has actually shown South America’s preparedness to play a greater role in global trade.
Mercosur combined constitutes the fifth largest economy in the world and with more than a quarter of its 400 million population between the age of 15 and 29, South America has tremendous potential. Taking advantage of high commodity prices, South America has recently been able to boost its economic performance. Experiencing sustained periods of strong economic growth, this performance is largely driven by international trade.
International trade driving South America
The indicators from Trade in Transition 2022, the Economist Impact research programme, sponsored by DP World, show that trade volumes saw a sharp increase in 2021 with South American exporters seeing a surge in part because of rising commodity prices. Three of the largest economies in South America; Argentina, Brazil, and Chile are known for their agricultural and metal commodities exports. All stand to benefit from inflationary price increases despite the higher import costs of fertilisers and refined oil due to ongoing geopolitical tensions.
Oilseeds are Brazil’s top agricultural export; Brazil and Argentina are among the world’s leading exporters of soybeans while metal prices have surged in 2022. Chile is the world’s largest supplier of copper and exported USD 23 billion worth of copper products in 2021 and metal ores are also among the top exports in Brazil.
Meanwhile, agreements between South American countries independent of Mercosur have long provided impetus for flexible and dynamic trade, with Ecuador, Peru, and Chile among the countries with the most open trading regulations in the world. As a clear direction of their ambitions, these countries have signed a host of individual trade agreements with the USA, the EU, and China.
While the Trade in Transition survey found inflationary pressures and geopolitical tensions between the U.S. and China the top concerns for South American executives, this global realignment could actually be cause of optimism.
Global realignment is an opportunity for South America
Latin America’s engagement with the Belt and Road Initiative saw trade increase with China to USD 314.8 billion in 2019. Surpassing the U.S. as the continent’s top trading partner, China has said it intends to increase bilateral trade with South America by $500 billion by 2025.
The United States-Mexico-Canada Agreement (USMCA) is largely viewed as an enhanced NAFTA, with renewed commitment to regional cooperation and integration. And the U.S.’s CHIPS, Science and Inflation Reduction Acts aim to incentivise the creation of homegrown technology production capabilities that compete with China. These policies design reshored and nearshored supply chains in North America, with lower transport costs and greater resilience as attractive benefits of the legislation.
However, these policies also have the potential to diminish North America’s trade influence in South America and further afield. Coupled with China’s growing influence in South America, the continent stands to benefit from a wider range of trade partners.
A reglobalised world
The U.S.’s and China’s varying influence in South America reflects something much broader. Reglobalisation, thanks to the growing centres of economic influence, will allow South American countries to expand beyond traditional foreign trade ties. China is a critical partner for the continent but the multipolarity of future international trade is a prime opportunity for South America to increase its trade volumes.
What does South America do next?
I’ve said previously that there are still major steps to be taken to grasp this opportunity.
Firstly, there is a serious infrastructure gap in South America that hinders trade. China has financed infrastructure projects across the region. But the Inter-American Development Bank estimates that the current shortage of adequate infrastructure creates a deficit of around USD 150 billion a year.
DP World’s own ports in South America in Santos, Brazil; San Antonio, Chile; and Callao, Peru are among some of the largest in the continent and helping to bridge the infrastructure gap. We are also investing heavily in landside logistics to enable trade to flow more easily between markets. Our Callao port expansion in Peru will also create one of the biggest single terminals in South America once completed in 2023.
Additionally, trade needs to be facilitated by better standardisation, harmonisation, digitalisation, and simplification of international trade procedures. Initiatives like ‘Single Windows’ can standardise information, reduce costs, and ease and expedite international trade procedures without broad trade agreements.
And finally, the measures above will allow for more dynamic participation in global value chains. Currently, Mercosur countries contribute just 34% to the total added value of regionally traded products. More participation will mean more dynamism into exports and regional value chains.
In a multipolar, reglobalised world, there is room for every region to play its part in global trade. Remapped supply chains and realigned policies are shifting how trade works. And in the Americas, with a few more steps, the South may just have the ideal platform to tip the balance of trade in its favour.
Sultan Ahmed Bin Sulayem, Chairman & CEO of DP World, Chairman of the Ports, Customs & Free Zone Corporation, Chairman of Virgin Hyperloop