A Fresh Start for Europe in Latin America?

MILAN – By 2050, Brazil and Mexico will be among the world’s six leading economies, according to analysts at the investment bank Goldman Sachs. Does the European Union care? Is Latin America to be Europe’s next missed business opportunity?

Latin America has a population of 550 million, with average yearly per capita income of $4,000, immense natural resources, and substantial human capital. It accounts for 8% of world production and grew by more than 5% in each of the past three years. Although the United States remains the main destination of Latin American and Caribbean exports, Asia is becoming an increasingly important market for goods based on natural resources.

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During the past four years, Latin America attracted an annual average of $61 billion in foreign direct investment, 60% of which went to Brazil and Mexico. In the 1990’s, foreign investors were chiefly attracted by privatization programs in the region, but more recently mergers and acquisitions and greenfield projects have been the most common type of investment. Predictably, Spain is the most important European investor in the region, though several important Spanish operations have recently passed to Italian companies, among them the utility Endesa, acquired by Enel, which is now the biggest private energy distributor in Latin America.

Meanwhile, Latin American businesses have been increasing their own foreign investments. In 2006, Brazil invested $28.2 billion abroad, compared to inflows of $18.8 billion. Indeed, emerging giants from Latin America and Asia will be at the center of worldwide investment in the coming decades. In 2006, Italy’s Fiat Group and India’s Tata Motors established a joint venture to make passenger vehicles and engines in India. The following year, they extended their partnership to Latin America, investing $80 million in production of a Tata pick-up truck at Fiat’s factory in Cordoba, Argentina.

It is to be hoped that many more major European corporations will follow suit. But small and medium sized enterprises (SMEs) – the majority of firms in both Latin America and Europe – find it difficult to trade and invest at international level, in part because of high transaction and information costs. In Europe, clusters of SMEs appear able to achieve economies of scale and scope, and thus to succeed collectively in global markets. This European experience is now being widely studied in Latin America.

In Brazil, four local production systems have combined to form Project Promos/Sebrae/BID, based on the example of Italy’s industrial districts. Between 2002 and 2006, Brazil’s SME support services and the Milan Chamber of Commerce created partnerships involving furniture, shoes, designer lingerie, and handicrafts from different regions of the country. This approach may well be the shape of things to come.

But, while the EU’s association agreement with Mexico is 10 years old, it does not yet have a strategic partnership with Brazil. This is partly because of the never-ending negotiation process with Mercosur, the troubled – and still incomplete – Latin American customs union.

The EU is currently negotiating trade liberalization deals with all of Latin America’s regional blocs: Mercosur, the Caribbean Community, the Central America Common Market, and the Andean Community. The EU must urge its Latin American partners towards further integration. Adopting a common “rule of origin” for their products would be an incentive to liberalize their international trade further, thus increasing it.

Full trade liberalization in Latin America, although difficult to achieve, must be made central to EU strategy, and would boost economic growth. But even if tariffs and quotas are progressively reduced, trade flows may remain low if other trade costs remain high. EU cooperation thus should be directed to lowering trade costs.

The crucial issue is market access. Most Latin American countries still get poor results from their efforts to export to Europe, the exceptions being raw materials and energy resources. After the establishment of the EU-Chile free-trade area, Chilean exports to the EU increased substantially. But in the case of EU-Mexico trade liberalization, the growth of imports from the EU has exceeded the growth of exports to Europe, resulting in a widening Mexican trade deficit with the EU.

This is at odds with the EU’s proclamations since the 1999 Rio summit that Latin America is a vital political and economic partner. A change in Europe’s approach is needed if a strategic partnership is to be created.

The European Commission understands this. Although the EU does not have a strategic partnership with Brazil, it intends to push ahead with one as fast as possible. In mid-2007, the Commission confirmed that it will revisit the EU’s dialogue with Mercosur, with the aim of giving new impetus to negotiations.

But there is also keen awareness that the EU’s hope for a special relationship with Brazil must not be allowed to hinder regional integration or worsen asymmetries and imbalances within the bloc. If Latin America is to become a strategic partner for the EU and a more attractive market for European companies, European institutions must become more open to the region’s needs.

A fresh start by the EU with Brazil and Mexico could prove promising, because of the “pull” it might have on other countries. But this must be accompanied by measures to keep all Latin American countries on board. Otherwise, Latin America may well prove to be Europe’s next missed business opportunity.