In March 2021, a ship ran aground in the Suez Canal and brought trade between Asia and Europe to a standstill for several weeks. As a result, the manufacturing activities of numerous factories, those that use a global value chain and just-in-time production system, came to a halt. A year earlier, the advent of Covid-19 had already caused delays in the delivery of automobiles around the world due to the restrictions imposed in Korea and China which crippled many car part plants.
This situation continued through 2021, creating a bottleneck in world goods trade and then, in 2022, the Russian invasion of Ukraine caused interruptions in the flow of food and raw materials such as wheat or vegetable or mineral oils such as steel, palladium. Globalization will likely suffer another setback with the eventual embargo placed on Russian oil and gas.
The smooth-running machine of global trade which, since the 1980s, has given Norway year-round access to tropical fruit and has permitted U.S. citizens to upgrade their cell phones every year at the same cost, has burst a gasket. Yet, logistics issues are not the only spanner in the works. There have also been major geopolitical and social blowouts that have stopped the world economy. The last few years have been fraught with stress tests that have put increasing pressure on the globalized trade model of the last few decades.
The arrival of a politician like Trump to the White House, who pulled out of the Trans-Pacific Partnership and slapped tariffs on Chinese and European products, was the watershed. It was no coincidence that Trump won the U.S. presidential election, partly in thanks to the support of Americans who blamed globalization for job losses and falling living standards.
In the United Kingdom, the British went on a crusade to isolate themselves from the world and voted in favor of Brexit, thus shattering the customs union with the other 27 EU-member countries and reinstating controls after a heyday period of 46 years in which goods flowed between the island and the continent. Meanwhile, within the European Union, France, invoking environmental concerns, though these are actually social undertones, continues to put the brakes on the Mercosur-EU agreement, which has been under negotiation since the end of the 20th century without ratification.
In many developed countries, the middle class has seen how unemployment has risen and their standard of living has declined since the 2008 crash and, more importantly, they seem to have lost hope for the future. Some of the casualties, as well as some politicians, have pointed the finger at globalization as the main culprit. On top of this, a new wave of protectionism, trade wars, and nationalism are sweeping the planet.
The reality is that we no longer live in such a placid world in terms of international relations and trade.
In the past five years, the standoff between China and the USA for global hegemony has resulted in a commercial cold war in which trade flows are changing rapidly. The U.S. understands that China has grown rich from the trillions of dollars Americans have spent on its products (and the intellectual property stolen from them), and it does not seem willing to fund the ascent of the Asian giant by continuing to buy its wares. Since the U.S. is the world’s largest consumer and China its largest producer, a trade war between the two countries, one with collateral effects on other partners, is a direct hit to the current system of international trade. Finally, the invasion of Ukraine has ended up demonstrating that international trade depends on very vulnerable flows. The countries of central Europe have seen how commercial ties with Russia, their main supplier of oil and gas, can be interrupted from one day to the next.
As James K. Galbraith pointed out in an article in Project Syndicate, these chains were designed to be efficient, but not resilient. From a macro point of view, they worked perfectly in times of relative peace and political and social stability in the world. This was especially true from the fall of the Berlin Wall until the economic crisis of 2008. However, the reality is that we no longer live in such a placid world in terms of international relations and trade.
Regionalization is the new globalization. It’s a golden opportunity for Latin America.
Let us ask the question: can developed countries maintain their standard of living by closing borders and putting the brakes on globalization?
Trump, and now Biden, have championed the return of factories to the U.S. in order to create employment and boost wages. Some manufacturers have returned to a huge press fanfare, though not in huge numbers. Others will never return because they have been automated along the way. Europe’s more bureaucratic, less aggressive discourse hints at developing “strategic autonomy” which, in practice, means being less dependent on foreign trade, for example, in the manufacture of microchips and medicines, and now also in energy matters. Governments and companies want their suppliers of products and raw materials as close as possible to their factories, even better if they are in the same country.
Despite all these considerations, it is unlikely that globalization will be reversed, for the simple reason that a return to the trade of the 1960s would mean widespread impoverishment of the world’s inhabitants. And neither American nor European voters will be willing to bring back their industry in exchange for a reduction in their standard of living through higher prices or shortages of some products.
Instead, what we are beginning to see is a transformation of the global trade model towards a regional trade model: a globalization of proximity. And it is in these possible winds of change that Latin America has much to gain, bringing many advantages to the U.S., the world’s and the region’s main consumer.
Proximity, competitive salaries, and international policy could catapult Latin America into the new paradigm of globalization.
A priori, Latin America offers many advantages in this new paradigm, starting with the obvious: its physical proximity to consumer markets, especially the U.S. The geographic factor, which has lain dormant for decades, is now pertinent once again, as demonstrated by the world’s recent logistics problems. Robert Kaplan’s theories on the relevance (revenge) of geography are back in vogue. Bringing consumers and producers closer together safeguards the supply chain, as well as reducing the pollution and energy consumption generated by mass goods transport around the world.
The wage factor could also play a part in making Latin America one of the winners in the new global trade puzzle. Wages in China, in Asian countries in general, have grown in the last decade and thus weakening the production competitiveness of certain items, particularly those which add low and medium value. This makes Latin America a comparatively good option for setting up shop, years after low-cost Asian production forced the closure of many textile, footwear, furniture, and other types of industries in the region.
The average salary in China’s urban and industrial areas is already close to $1,000 per month, a figure that is already higher than most Latin American wages and almost double that of the northern triangle of Central America (Honduras, El Salvador, and Guatemala), which is one of the regions with the greatest potential for setting factories to supply the giant North American markets.
Finally, the political and geostrategic factors could help Latin America – if, that is, its rulers are capable of seizing the moment. Given that not all industries will be able to relocate back to the U.S. or Europe because of wage costs, what better option than to move them to nearby countries that are cost-competitive and do not pose a military or economic threat?
If the Americans no longer want to fund the meteoric rise of China by purchasing its goods but cannot themselves manufacture all the products they import from China, there is only one other solution. Relocating to other countries. Some of this is already happening. And if the Europeans do not want to continue financing the Russian military threat, they will have to continue with their local production and also look for other less bellicose suppliers in other regions.
In recent years, many factories have moved from the Asian giant to neighboring countries like Vietnam. But Latin America provides a closer option and, additionally, from a geostrategic point of view, U.S. trading with its southern neighbors does not imply relinquishing its power – just the opposite in fact, as this would strengthen its influence through trade. Moreover, this could have other positive add-ons, such as curbing migration to the U.S. from the southern part of the continent, which is a major political and social headache in its own right in both the southern and northern hemispheres of the Americas.
In Europe, many firms are relocating production from Asia to countries such as Tunisia, Morocco and Turkey. The Spanish firm Inditex, the parent company of Zara, is one of them, manufacturing 60% of its garments in Portugal, Morocco, and Turkey. According to McKinsey’s The State of Fashion 2022 report, 70% of the world’s fashion companies plan to move their production centers closer to their home countries.
Is Mexico an example for Latin America?
Mexico is one of Latin America’s success stories. Since the signing of the free trade agreement with the U.S. and Canada, it has become the largest automobile producer in Latin America, exporting 80% of its production, mainly to the U.S. It provides direct and indirect jobs for one million Mexicans, offering jobs with better salaries and conditions than the national average.
Not to mention other Mexican maquila industries such as the textile and electronics factories located on the northern border. Other companies are making similar decisions. Mattel, for example, recently announced that it is asking some suppliers to move their operations to Mexico in order to turn the country into a major toy supplier for the entire continent. It is no coincidence that Mexico is one of the region’s leading countries with one of the most stable economies and a per capita income that exceeds the regional average.
Among the smaller countries, Costa Rica, with its technology and healthcare industries, and Uruguay, which is home to many high-tech consultancy firms, are already taking advantage of these opportunities to diversify and develop their economic base. Some Spanish-owned factories, such as Nextil, set up business in Guatemala last year to supply fabric to their European and U.S. customers.
There are challenges in making Latin America a new regional hub.
If greater integration and the location of factories in Latin America offer so many advantages for both the U.S. and other countries in the region, why is this process not moving forward at a faster rate? What steps should governments take to capitalize on the opportunity offered by this fledgling shift in globalization.
What needs to be improved in Latin America to attract productive foreign direct investment? There are several issues. Political instability, for example, undermines the region’s huge potential, according to companies already operating on the ground. An unreliable legal framework, fluctuating exchange rates and poor infrastructure are other causes that have been cited. The development of regional value chains to boost intra-regional commerce and the flow of trade between the region’s economies and the U.S. and other destinations is another challenge facing Latin America, as highlighted in the latest CAF report published in 2021. The biggest handicap for the development of industries in Latin America that fit seamlessly into the global value chain can be summed up in investment-friendly “public policies” and the need for foreign policy that is at least neutral in relation to its target markets, i.e., Europe and the U.S.
There is a geopolitical tailwind blowing for Latin America, a continent that is less involved in bloc confrontations than the other four. The task now is to take advantage of this fresh air and welcome the winds of change.
© IE Insights.