New trade winds in Latin America

By Umberto Mazzei

Geneva, 29/03/2010

The Free Trade Agreements –FTAs- of Latin American countries with the United States have fragmented  and made irrelevant the old schemes of economic integration. The only unscathed one is MERCOSUR. That has divided Latin America into two groups:

1. The group in subordinate integration with the United States, in order to export raw materials and cheap labor, under commitments that leave no choice in economic policy. There we find Mexico, Chile, Central America, Dominican Republic and Peru. While Colombia, Costa Rica and Panama are waiting for ratification.

2. The other group covers, in a more or less equal footing, those Latin American countries with independent economic policies. Those four of MERCOSUR (Argentina, Brazil, Uruguay and Paraguay) and those of ALBA (Bolivia, Cuba, Ecuador and Venezuela). The ALBA solidarity approach allows in countries tied with FTAs, such as Honduras and Nicaragua.

A research paper at the University of Castilla la Mancha, presented during the "XII Meeting of Economists on Globalization", in Havana, showed how the crisis affected Latin America least because the local processes of integration were "much more meaningful and compact from the commercial view point than FTAs or other preferential trade agreements with major trading blocs of the developed countries."[1]

 Trade Pattern with the United States.
Central American and Dominican exports are agricultural goods, raw materials and labor intensive (draw back) textile products. Chilean exports are concentrated in raw materials, agricultural or agro-industrial products and some services. Mexican exports, in addition to all of the above, include metal-mechanical industrial goods.

U. S. exports grew immediately with FTAs, until to the point of reversing a trade balance that previously was favourable to the Latin American partners. US Mainly exports are cereals and chicken, with which Latin producers can not compete because of the huge subsidies they receive from the U.S. government. Imports of services grew in Chile and Mexico and also at  other partners, as we can see from the purchase of public services by international cartels.

Trade in services of Chile and Mexico with the United States.

We analyze only trade in services of Chile and Mexico with the United States, because we were unable to find a way to disaggregate the data statistics in others. It is the norm that trade in services is very favourable to the United States, because of the barriers it imposes. It is a matter of general concern, since many of those services are financial services by the banks that sell the “securities" without security at the root of the global fraud that we all -but the banks- pay for.

Merchandise trade of Chile and Mexico with the United States.
Both are cases of an increase in trade and of a significant positive trade balance. These include much export of raw materials (such as copper and oil) whose prices rose until 2008, but then dropped to prices that now hover around a half of former ones.

Chile

Chile was the window case for  export led growth, but in 2007, the trade balance with U.S. became less positive. In 2008 and 2009 and was very negative. The export of copper cathodes barely reached $ 919 million in December 2008, 50% of the previous annual average ($ 1,691 million). Same goes for the pulp industry, its second largest exporter. Imports also fell by 33%. The economy has stopped growing and it is estimated that in 2010 will fall by 1.5%[2].

Chile is less vulnerable than Mexico and Central America in its trade with the United States, because its exports to U. S. amount only to a 13% of its total exports ($ 68 billion, 2009est.[3]). China already buys more: 19% and a with a trade balance favourable (7629 mill., 2009) to Chile, which more than offset the trade deficit with the U. S.

Mexico

Mexico is the largest U.S. trading partner. The table shows merchandise trade with the United States since 1993, the year before NAFTA

The Mexican economy needs a growing and favourable trade balance with the United States because it is the only engine of its economy. Their governments deserted other sectors, to align with the interests of export groups. It's playing Russian roulette, because among the large Mexican exporters, very few are Mexican. Most are stateless corporations that poster bets for a quick gain on Wall Street and other financial frivolity casinos.

The most important items of Mexico's exports is on automotive metalworking, which reached $ 52.562 million in 2007[4]. The second item is the oil, with prices that are now held down by the same international cartel that made them rise without visible cause in 2007 – 2008. The trade volume between Mexico and the U. S. decreased since then. In 2009, imports from Mexico fell 21% and exports fell 27%. The trade balance is still favourable to Mexico, but decreased by 41% between 2007 and 2009.

Since NAFTA (1994), Mexico is a satellite of the U.S. market, where 87% of its exports go. A fatal dependency. Canada sends about 86% of its exports to the U. S. and is also dependent, but it has a vital internal autonomy in agriculture, industry and technology. Mexico sacrificed its agriculture and its industries to the cult of a free trade preached by the stateless cartels that have already captured the developed world and use it to get to the rest.

Trade of Central America and Dominican Republic with the United States.
The Dominicans and Central Americans have no commercial or political links between them. The idea of associating them in a trade agreement comes from the U. S., because it simplifies its dealings with those economies, which in it views as part of the same region and compete with the same products on the U. S. market. It is remarkable that the U.S. left out Haiti.

Another common feature is that all of them had – before their FTAs- a trade surplus with the U. S., which mitigated something else they share: the unfair distribution of income, the low industrial investment, the poor infrastructure and the neglect of human development.

Their favourable trade balance stopped with the DR-CAFTA and the entry of agricultural products subsidized by the U.S.. Trade was already negative in 2006, 2007 and 2008: El Salvador (-295, -269, -236), Guatemala (-409, 1044, 1271), Honduras (+30, -549, -807) and Dominican Republic (-819, 1868, 2624). The joint negative trade balance was $ 2,133 million in 2006, $ 3,018 million in 2007 and $ 4.327 million in 2008. This unfavourable trade tighten an already explosive economic and social situation (Honduras docit).

The only country with a positive trade balance is Nicaragua (+735, +714, +611), thanks to more flexible rules of origin in textiles, which are its main export (55%) to the U. S.. That dependency makes it vulnerable to the ongoing contraction in textile demand, when China is the main competitor and Nicaragua is the number 22 on the list.

In 2008, there was celebration in Washington over the benefit for North-American cartels of an unfavourable balance for Dominicans and Central Americans: the then Secretary of Agriculture Ed Schafer, proclaimed that 2008 had broken all records of agricultural exports. About  FTA’s, he said "All of them have brought benefits and the one with Central American stands out as one of the greatest successes of this administration [Bush] on the trade front".[5]

In 2009, the numbers got even worse for Central America. Trade with the United States decreased in both, exports and imports, as a clear signal of national impoverishment. In Nicaragua trade remained favourable, but with a decrease in volume.

Those figures exacerbate social and economic tension in economies without that many resources. The subsidized agricultural imports destroys the rural social fabric and pushes into their cities people who only know about agriculture for their livelihood. It is a recipe for hunger and violence where there is big social inequalities and ethnic tensions. Something their elites, addicted to the American cultural model, do not understand.  

El Salvador is a case in point. Since 2001 the dollar is the national currency and remittances from emigrants (about 3.7 billion) help a 22% of its population[6]. The electoral victory of the FMLN[7], the guerrilla group, was a peaceful rejection of the traditional elite, but, What happens when there is not a peaceful channel for despair?

Newcomers
Colombia, Costa Rica, Panama and Peru also signed free trade agreements with the U. S. The only in effect is that of Peru, from February 1, 2009.

Peru

Peru has just 10 months experience on its FTA with the U.S. and with the crisis already installed, so we can not refer to the effect of the crisis on their trade. Peru's exports to the United States are stable. The most important items are oil and mining products (copper, gold and precious metals) and some food. The trade balance was positive for Peru, but turned negative since 2008, due to imports of machinery and equipment for oil exploration and mining, which started in late 2007.

Costa Rica

Costa Rica’s FTA was approved by the U.S. Congress and ratified locally in a very close referendum, but is not yet in force, because some laws must be adapted. There is strong resistance to change intellectual property law to prolong pharmaceutical patents, a move that will increase the cost of public health care. Meanwhile Costa Rica keeps the CBI preferences, so it doesn’t affect its exports to the United States. The purpose of  FTAs is to open foreign markets to U. S. subsidized agro-business products and to the services and investment corporate cartels.

Costa Rica's figures for 2009 show a huge change on exports. It is due to a change in the way of accounting for exports from the local Intel plant, the largest exporter of Costa Rica. The major customer of Intel Costa Rican exports is China and China's trade statistics with Costa Rica show only growth. It may be that Intel components are now transiting the U. S. in their way to China.

Colombia

The approval of the FTA with Colombia by the U. S. Congress has met some resistance because of the endemic killing of Colombian union leaders. Not that there is any practical disturbance, since Colombia applies all the facilities that the United States demanded in the agreement.

Oil is the main export from Colombia to the U. S.. Other exports are perishable agricultural goods (flowers), textiles and mining products. Outside of oil, the pattern is very similar to that Central America.

Panama

Panama's trade with the United States is the most lopsided of the whole region. Imports are substantial and exports are minimal. Keep in mind that Panama is a distribution centre for American products to South America, so we assume that some imports re-exported to other destinations. The negative trade with the United States is paid for by income from the Panama Canal.

The independent countries in the region
According to the Economic Survey of Latin America and the Caribbean[8], ECLAC, the crisis wore down trade of countries in the area with their traditional partners: the United States and the European Union. The U.S. trade stagnated in 2008 and declined in 2009.

The table shows an asymmetric inconsistency in U.S. arbitrary policy with Cuba. The U. S. agribusiness makes it possible to export agricultural products to Cuba, but the prohibition to export to Cuba any thing useful is still in force. Concerning Cuban exports to U. S. the ban is total -in violation of all norms of international law- even when as parts of third party products; at least concerning exports there is criminal consistency.

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Some believe that once the crisis is over, the old trade schemes will return, but that is not quite logical. There are new consistent partners and more friendly ones, because they are not imposing political conditions and have real economic pull. The new players are in Eurasia, the axis of the world from a historical perspective. The most prominent ones are China and Russia, that have complementary strength and both are used to be key players.

New business directions
It is remarkable and irreversible that trade with China, Russia and other Asian countries   grow, because they fill a growth void. For Brazil, not only China became its top trading partner, but also trade with India[9] has grown much and even, from very little, with Russia[10].

The trend in those Latin American countries less tied to the United States is to increase their trade with China and other countries in Eurasia. A clear indication of how trade will flow and who will be key players in international economic relations when the U.S. crisis is over. South American countries with large economies and unfettered by FTAs- with the exception of Venezuela - trade more now with China than they ever traded with the U.S.

China's trade with countries that have signed FTAs with the United States varies greatly. Central American countries - with the exception of Costa Rica[11]- have 62 years without recognizing the Beijing government and pretend that China is governed from Taipei.

Those Central Americans do import from China, but export there very little. Others, like Chile and Peru, trade more with China than with the United States and have very favourable trade balances.
 
A sign of the great fear inspired by Chinese trade expansion is the present campaign of falsely accusing China of manipulating it’s currency, the Renminbi (Yuan). which is pegged  to the dollar in a fixed exchange rate. Instead of depreciate, as some say, it has in fact revaluated a little. Rather than fearing China’s export power, U. S. should fear China’s purchasing power, which makes it influential. China’s purchasing power would grow as the Renmimbi rises.

Recently[12], the Chinese Commerce Minister, Chen Deming, said that those pressures did not solve trade imbalances, it would suffice for the U.S. to release the embargo against the sale of high-tech products to China to receive billions in Chinese purchases. Minister Deming also pointed out something rather interesting: "U.S. companies in China are those that send 60% of Chinese exports to the United States." That means a big presence of U. S. corporations in China and to revalue the renminbi would increase the dollar value of their investment there and thus, it’s stock value.

It is the type of unproductive stock rise by which, in 2009, a dozen financial magnates earned 25.3 billion dollars[13] with the crisis, while millions of Americans lost their homes. Between 1990 and 2008, Foreign Direct Investment in China was 850 billion[14], so if China revalues the Renminbi, say 10%, investors would share a profit of $85 billions, without having done anything. As it happens, everything that Washington asks or does, begins and ends on Wall Street.