Latin Trade, Investment Prospects and the U.S. Election

Opinion, by Michael Kalavritinos

RIO DE JANEIRO, BRAZIL – In the CNN debate prior to the Florida primary, the Republican front-runner called for a hemispheric focus on free trade by calling for the implementation of the Panama and Colombia Free Trade Agreements (FTAs). There is a realization that the U.S. needs to become more active in Latin America, especially since U.S.-Latin trade accounted for over thirty percent of total U.S. trade in 2011.

To that end, the U.S. has pursued a myriad of FTAs with Peru, Colombia, and Panama. These agreements have been preceded and often complemented by Double Taxation Agreements (DTAs), which promotes cross-border investment by the avoidance of double-taxation in both countries.

The U.S.-Chile DTA, for example, would facilitate investment by Chilean pension funds into the U.S. The reality is that today such funds invest 36 percent of their total assets in non-U.S. mutual funds. Lowering the withholding tax rate from thirty percent to fifteen percent would provide a necessary catalyst.

In a similar fashion, the Tax Information Exchange Agreement (TIEA) with Panama had the positive effect of removing it from the OECD’s tax haven “grey” list, providing greater flows into Panamanian banks and guaranteeing access to U.S. financial, telecommunications, computer and other firms.

While progress on these fronts is commendable, there is more opportunity for expanding these types of economic relationships. One that merits serious attention from both sides is the U.S.-Brazilian relationship.

Free trade (including an FTA) and investment are key to the growth of this relationship. U.S.-Brazil trade grew 25 percent last year, surpassing Mexico and vaulting Brazil past France as the U.S.’s eight largest trading partner and past the UK to become the world’s sixth largest economy.

The little known working groups of Anbima (Brazil Financial and Capital Markets Association) and FIAFIN (Ibero-American Federation of Investment Funds) are laboring to promote cross-border investment in anticipation of Brazilian investor diversification.

Today, only 0.1 percent of the US$316 billion pension fund industry invests outside of Brazil, and that amount is invested in Brazil global bonds. In addition, while the Brazilian Central Bank holds about US$200 billion in U.S. government securities, it represents only four percent of their total portfolio.

Many global financial firms with material presence in Brazil offer a myriad of local and global solutions to Brazilian public and private investors. They can help to provide much needed diversity and to shape the financial culture and appetite through a transfer of knowledge and the sharing of best practices. Although the U.S. remains the largest direct investor in Brazil, the flows are not reciprocal.

One opportunity for moving the economic relationship forward is the TIEA which is pending approval in the Brazilian Senate. The U.S.-Brazil CEO Forum, with representation from Citibank, Anadarko, Cargill, Safra, and Camargo Correa among others, supports the TIEA. On another important front, it should be noted that U.S. and Brazilian business leaders also agree that dealing with intellectual property issues should be a priority.

In the context of the Presidential election, it remains to be seen what prominence U.S.-Latin America trade relations are afforded, but the opportunities in a region that boasts some of the world’s fastest growing economies should not be missed. The next administration should continue to build upon the progress of recent years and work to strengthen this economic relationship for the benefit of both countries.

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Michael Kalavritinos is a Managing Director at The Bank of New York Mellon based in Rio de Janeiro. The views expressed are his own and no not reflect the views of The Bank of New York Mellon.