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OPINION: Is Latin America India’s new trade frontier?

Latin America has been quite a stark underperformer over the past decade

Prime Minister Narendra Modi’s upcoming visit to the US is expected to provide fresh impetus to the Indo-US ties, coming as it does on the back of a laser-like and very welcome focus over the past decade on getting businesses from both countries to take the lead in forging a closer economic relationship. An important strand of this effort, given the growing Chinese presence in America’s backyard, as it were, could be designing a collaborative policy approach towards Latin America.

Once the world’s most prosperous emerging-market region, Latin America has been quite a stark underperformer over the past decade and is in danger of being overtaken by its peers in the coming decade owing to its sluggish and unevenly distributed growth, according to the December 2022 Goldman Sachs global economy report The Path to 2075. The region is cited as a prime example of being ensnared in the middle-income trap and to that extent offers lessons on what not to do.

As Brookings scholars Jaana Remes and Homi Kharas underline, to break that pattern and make growth more dynamic and inclusive, Latin American economies must fill two ‘missing middles’: A lack of medium-size firms that can foster competition, and too few middle-class consumers whose spending could create much-needed demand. Harnessing the power of new digital technologies will be crucial to meeting both imperatives.

China’s maturing relationship with Latin America, driven primarily by economic security interests, could fill the investment gap in the region. Latin American nations welcomed Beijing’s entry into the hemisphere in the mid-2000s, and the first decade of growth in trade and investment was beneficial for many of them. The relationship has now morphed into a more pragmatic embrace; there is pushback in some countries, but the benefits of closer ties with China seem to outweigh the costs for others.

China has significantly expanded its influence in the region. Chinese customers now purchase almost 15 per cent of the region’s exports, up from just 1 per cent in 2000. A total of 21 Latin American countries are participants in Beijing’s Belt and Road Initiative, the Washington Post reports.

The United States, meanwhile, has woken up to the long-term threat China poses to its own role as the leading power in the region. The US is looking for a more robust policy response in Latin America but domestic issues are an obstacle.

In January 2023, Washington announced negotiations with 11 mostly Latin American nations on an agreement designed to promote regional economic cooperation, but without offering greater access to the US market for their goods. The initiative is intended to spur broad prosperity and tackle some of the hemisphere’s toughest problems, including mass migration to the US. But the Americas Partnership for Economic Prosperity (APEP) falls short of the traditional trade agreements the US has negotiated in the past. At best, the APEP reflects US efforts to reconcile a desire for stronger regional ties with domestic opposition to further trade liberalisation, which many lawmakers — and the Democrats’ labour union allies — blame for the loss of millions of US manufacturing jobs.

India’s political engagement with Latin American nations – especially as far as G-20 members Argentina, Brazil, and Mexico are concerned – has deepened over past years, and could result in a more robust economic relationship. India’s most strategic commercial partner in the region, Venezuela, home to the world’s largest petroleum reserves and which till 2019 accounted for close to 10 per cent of India’s total oil imports, will likely regain importance when US sanctions are lifted fully.

According to Asia-Latin America Expert for the United Nations Development Programme (UNDP) Hari Seshasayee, of the other Latin American countries, three stand out as critical suppliers of minerals and hydrocarbons, and as growing markets for Indian exports: Chile, Colombia, and Peru, which account for 20 per cent of India’s total trade with the Latin American region. Ecuador, Paraguay, Dominican Republic, and Central American countries like Panama and Guatemala, may not trade as much with India but are nonetheless important destinations for Indian exports and investments in IT and pharma.

For instance, IT firm HCL employs 2,230 people in Guatemala, and Caplin Point, an Indian pharma company, has a regional base in Central America and the Caribbean that accounts for more than 80 per cent of the firm’s global exports. Indian carmaker Mahindra & Mahindra has set up 50 dealerships in Chile, and Peruvian mining-equipment company Resemin is aiming to grow at a 50 per cent annual clip in India on the strength of its specialised drilling rigs.

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