Impact of the reorganization of value chains in Latin America

President Luiz Inácio Lula da Silva’s visit to President Joe Biden on Friday almost coincided with Washington’s recent announcement that the US trade deficit in goods and services will reach about US$1 trillion by 2022, a 12.2% increase over the previous year.

The US had a surplus in goods trade with some countries, such as Brazil (US$$14.6 billion), Hong Kong (US$21.1 billion), and the Netherlands (US$38.3 billion), according to Trade Department data.

The US trade deficit in goods continued to grow with countries such as Mexico (it bought US$130.6 billion more than it sold in total), Vietnam (US$116.1 billion), Canada (US$81.6 billion), Taiwan (US$48.1 billion), South Korea (US$43.9 billion), and India (US$38.3 billion), with producers seeking new sources of foreign goods.

This time, the New York Times interpreted these figures as a sign that the reorganization of global value chains is taking place amid more US barriers to trade with China and a quest to diversify import sources.

The resilience of value chains in the region is one of Joe Biden’s hammered themes, and it will come as no surprise if it is mentioned in the conversation with Lula at the White House.

The reorganization of global value chains is incipient and, in fact, depends much more on political than economic factors, as indicated in a study published by the Inter-American Development Bank (IDB).

It considers that, except for Mexico, it is not clear that Latin America will benefit from this movement because of a series of factors such as labor cost and quality, productivity, logistics, macroeconomic stability, and the protectionism of the developing countries, which are more inclined to bring production back home (reshoring) than to closer regions (nearshoring).

The study was written by Mauricio Mesquita Moreira, Juan Blyde, Christian Volpe, Marcelo Dolabella, and Ignacio Marra.

It gives a technical analysis of the forces behind reshoring and nearshoring and the potential conflicts and benefits for Latin America.

The authors try to avoid rhetorical gimmicks and political agendas.

And they examine only the short-term effects of the surcharges imposed by then-President Donald Trump in 2017-2019 in the confrontation with China before the covid-19 pandemic and the war in Ukraine.

Here are some points highlighted by Mauricio Mesquita Moreira, chief economist of the IDB’s Integration and Trade Department:

1 – There was no hard evidence that globalization was coming to its end, either by regionalization or reshoring or neashoring of trade or investments (indications in this sense only in qualitative/subjective opinion surveys with companies – always subject to the political influences of occasion – which still, not always conclusive).

2 – Past natural shocks, such as earthquakes in Japan or floods in Thailand, suggested that value chains, if left to market influence, tended to be re-established without major changes in their configuration.

Something that suggested that the covid shock, despite its greater amplitude/magnitude, would not necessarily represent a major reconfiguration.

The post-covid trade data suggest a rapid recovery and corroborate this expectation.

3 – The substantial shock imposed by Trump on China’s exports, with tariffs as high as 25%, did not have a significant positive effect on the region’s exports, with the honorable exception of Mexico, which still lagged behind other Asian beneficiaries such as Vietnam.

Something that does not seem surprising.

The region’s disadvantages derived from high relative labor costs, low productivity, high logistics costs, and political and macroeconomic instability have not changed and tend to offset eventual tariff advantages.

The comparative advantages in natural resources also do not help any prospect of an export boom in manufactured goods.

4 – Results like these suggest that one should be conservative when indicating that eventual changes in value chains would be a great opportunity for the region.

Especially when talking about manufactured goods, assuming that the world economy, despite geopolitical conflicts, remains predominantly driven by market prices and comparative advantages.

5 – It is clear that this scenario of the predominance of market relations is far from guaranteed.

Its probability decreases with the intensification of US conflicts with China, using trade and investments as weapons after the war in Ukraine, and the revival of clearly nationalist/protectionist industrial policies in the major Western economies.

6 – However, it is important not to lose sight of the fact that in such a scenario – of fragmentation/balance and nationalization of the world economy – Latin America would probably have much to lose, among other reasons:

(a) by the loss of access – total or partial – to markets not only like the Chinese one (assuming it joins the ” Western bloc”) but also the American one (by the sharpening of nationalist industrial policies);

(b) by the fiscal and institutional incapacity (see past experiences) to participate in a subsidy war, in particular against the large Western and Asian economies; and

(c) by the collapse of the multilateral trade system, which would prevent it from contesting any predatory trade practices by large economies.

For Mauricio, the discussion on neashoring/reshoring in Brazil and the rest of the region cannot lose sight of these facts and challenges.

As he notes, it is far from being a panacea without costs, as a certain kind of rhetoric often suggests.

Two other recent studies by the International Monetary Fund (IMF) and the World Trade Organization (WTO) highlight the costs of fragmentation, particularly for developing countries.

With information from Valor Econômico