Latin America the overlooked trade giant of Australia’s G20

Monday 17 November 2014

The large waved Swinburne signage of the Advanced Manufacturing and Design Centre building in Hawthorn which faces East down Burwood Road.

In summary

  • Analysis for The Conversation by Alexis Sergio Esposto, Senior Lecturer, Economics, Swinburne University of Technology

While much of Australia’s media has been covering Abbott’s macho stance on Russian President Vladimir Putin, the G20 meetings will be focusing on how best to improve global trade, which severely declined shortly after the global financial crisis.

Central to these discussions will be how best to reduce trade barriers and protectionism. For Australia, this is a great moment to seriously consider the trade expansion opportunities with Latin America, particularly at a time when G20 nations members like Argentina, Brazil and Mexico are gaining economic and political authority around the world.

In recent years, Australia’s trade relations with Latin America have undergone a rate of growth never seen before. Paradoxically, there are enduring perceptions in Australia of Latin America as a difficult region for engaging in business. These include misguided opinions that working in Latin America involves high levels of bureaucracy and corruption and that the region is a close competitor with Australia’s primary producers.

Despite South America being one of Australia’s first trading partners (starting with the First Fleet), trade obstacles need to be removed so that tariff impositions, particularly on agricultural products placed by both Europe and the US, do not limit its economic development.

Opportunities for trade expansion between Australia and Latin America abound. Recent research found some countries in Latin America have advantages in high-end elaborately transformed manufactures, which Australia does not have. These can be accessed at lower cost than from some of Latin America’s immediate competitors. Important trade opportunities in the services and in two-way foreign direct investment are also growing at a rapid pace.

My analysis of merchandise trade alone shows strong growth in Australian exports to the region over the last two decades. Total exports to Latin America grew 3.3 times, driven by the rapid rise in exports to Chile (4.1 times), Mexico (4.8 times), Brazil (2.5 times), Argentina (3.2 times) and Peru (4.9 times). For three of these five economies, the growth in exports was either equal or stronger than that of the rest of the world. Similarly, imports from Latin American countries grew at more than 8 times compared to the rest of the world, which nearly quadrupled.

An even brighter future

My forecasts of trade growth between the five Latin American countries mentioned and Australia in terms of merchandise imports and exports makes the future look even brighter. Using 2012 as the base for growth, trade growth over a five-year period is forecast to be quite strong, growing on average by between 30%, the (low growth scenario) and 70% (the high growth scenario).

These predictions are consistent with economic analysis conducted by Deloitte this year which identified “25 sectoral hotspots with the biggest potential to lift Australia’s growth trajectory over the next 20 years”. Some of the sectors that can benefit from trade with Latin America include mining, finance, education, green energy, gas, agribusiness and tourism. And its likely new sectoral drivers will emerge as both the Australian economy and that of Latin American countries continue to evolve and develop.

What’s standing in the way

Perceptions that Latin America is lacking corporate governance, presents a political and economic risk and will settle for the English language in trade negotiations need to be overcome. Improving the understanding of language, culture and history of Latin America is crucial for the development of solid business and social relations.

To reduce perceived “large distances”, more frequent flights between capital cities such as Melbourne and Santiago or Buenos Aires must be promoted.

Latin America offers Australia huge opportunities for economic and social engagement. With its natural economic endowments, rapidly growing middle class, young population and willingness to transform itself into highly developed societies, Latin America has left behind a past characterised by civil unrest and political turmoil and is experiencing a long term path of democracy and solid economic development. Trends in trade growth continue to point to Latin America as a region that warrants our immediate attention. The sooner we embrace these opportunities the brighter Australia’s economic future will be.

The Conversation

Written by Alexis Sergio Esposto, Senior Lecturer, Economics, Swinburne University of Technology

This article was originally published on The Conversation. Read the original article.