International trade between Latin America and the United States, 1980s-1990s

International Trade

The Latin American economy has been following a constantly ascending development trend in the last decades, despite several crisis that took back the past progress on the respective occasions, like the financial crisis in Argentina in 2002. Based on the wealth of natural resources, the economies of Latin America grew on their exports, as well as on the investments made usually by foreign corporations in industries ranging from manufacturing to extracting and oil production. Markets such as the Brazilian or Argentinean markets have become excellent debouches for European or North American products, which helped, due to high consumption rates, increase the important quotas as well.

Internal trade within the continent is also an important part of the Latin American trade. More and more, over the last couple of years, regional economic organizations, usually modeled after the European Union, have created free trade agreements and are already completing the necessary steps towards the advancement of their integration processes, to include customs union or even political integration at some phase in the future. Mercosur, with the two economic giants, Brazil and Argentine, is perhaps the best and most successful example, but this can continue with smaller regional commercial organizations such as ALADI, the Andean Community, etc.

This trend is most likely going to continue on a regional level within the continent, but we expect a continuous liberalization of trade between Latin America and other countries. At this moment, the negotiations between Columbia and the U.S. For the signing of a free trade agreement are well on their way and the commercial relations between Latin America and the European Union are also likely to continue to grow over the next period of time. The U.S. has already functional free trade agreement with Mexico (within the NAFTA framework), with the Central American countries (CAFTA), with Chile, while the ones with Peru and Panama, alongside the one with Columbia, are also pending.

Development in trade with USA in the 1980's and 1990's

According to different sources, for a good part of the 1980s and, in fact, following a trend that started back in the 1960s, the rhythm of growth for U.S. imports from Latin America significantly exceeded the level of exports with the same region. As such, between 1967 and 1987, the imports from Latin America into the Untied States grew by an average of 9.5%, while the exports grew by only an average of 6.4%.

It seems that the explanations for these can be found both in the United States and Latin America. First of all, this period is characteristic for an overvalued dollar in comparison with the currencies in Latin America. This meant that the U.S. products would tend to be more costly to produce than countries with weaker currencies and this made them less competitive on international markets, including on the Latin American market.

At the same time, economically this is a period of troubled financials for the countries in Latin America, the large amount of international debt making it sometimes impossible for Latin American countries to purchase overseas and, in some cases, hampering the trade and commercial relations that these countries had with the international community.

It is also interesting to note the structure of the import and export growth between the U.S. And Latin America in the 1980s. The proportion of manufactured and secondary products increased in the imports to the U.S. during this period, which is a good argumentation that the Latin American countries started a sustained process of industrialization, leading to a diversification in their export structure from primary products gradually towards secondary and manufactured ones.

During the 1990s, the trade between the U.S. And Latin America grew at the fastest pace, with the exception of Africa, where the high percentage of growth can be explained by the very low initial values. As such, the total volume of trade between the United States and Latin America grew between 1996 and 2006 with 118%. If we compare this to the growth in trade with Asia (96%) or Europe (95%), we can better understand the dimension of the growth rate of trade with Latin America.

On the other hand, some important observations are in order. The growth was driven mostly by Mexico, country which entered a free trade agreement with the U.S. And Canada, a free trade agreement which obviously boosted the commercial relations between the three commercial partners. If Mexico is taken out of the equation, the growth is of only 69.5% over the discussed period of time.

On the other hand, even if taken individually, all countries in Latin America experienced a significant growth in their volume of trade with the United States. Brazil's trade with the U.S. grew with 51.2% from 1996 to 2006, reaching a total volume of $19.2 billions in 2006. Trade with Chile grew in volume with 65.9% and, despite politically strained relations with Venezuela, the trade with this country grew with 87.5% over the 1996-2006 period, mostly driven by oil imports from Venezuela. So, over the period from 1996 to 2006, a growing trend of commercial volume with the Latin American countries continued the process begun in the 1970s and 1980s.

Positive vs. negative assessment

The opening up of Latin America to the commercial world and towards free trade and liberalization policies can obviously be judged from different perspectives for the countries in this region. As we assess the impact that the trade liberalization policies of the mid-1990s played on the Latin American economies, we will keep in mind both the positive and negative consequences that trade liberalization and an increase of trade volume and trade relations with the U.S. And the European Union had on the countries in Latin America.

As we have seen, the volume with both the U.S. And the EU during the 1980s maintained reasonably small proportions. One of them has already been analyzed previously: the financial strain on the countries in Latin America was already significant during this period of time, which seriously limited both their payment options on the international market and their capacity to honor payment for imports.

On the other hand, the liberalization in Latin American countries was still relatively limited during the 1980s, which meant that most of the industries were either controlled by central authorities or private initiative was generally not encouraged that much. This translated to the commercial segment as well, with private initiatives for import and exports being still relatively rare.

At the same time, foreign companies were not encouraged to penetrate the Latin American market and this was still a trend at the beginning of the 1990s. Only during the 1990s the U.S. companies and some of the European ones (notably from Spain or Italy) began to invest in Latin American countries and to benefit from the large internal market that Latin America was offering.

The reasons that the trade between Latin American countries and the U.S. And the EU experiences such a boom during the 1990s can be found in the gradual opening of the Latin American market, along with an encouragement for exports, a rise in internal consumption and the general governmental policies that were aimed at boosting the volume of trade and accelerating the liberalization process. Let's have a look at each of these in part.

The opening up of the Latin American market meant that foreign companies found at the beginning of the 1990s a business environment that facilitated foreign implementation in these countries and that created the premises for the further development of these economies.

With new management methods and production techniques, the Latin American economies gradually grew at a rate that allowed them to increase their exports as well, because there were surpluses that could not be turned towards the international market. This in part explained the growth in exports from Latin America, mainly towards the EU and the U.S., where the companies investing in Latin America were also located.

At the same time, it was obvious that with the growth of the economies, the internal consumption also increased, this being immediately reflected into the import levels with the main suppliers from the EU or the U.S. Internal consumption meant a constant increase in demand levels from the internal market, because the potential consumers had the revenues to spend on imported products.

On the other hand, governmental policies also meant political negotiations, not only for the creation of free trade agreements between some of the countries in the region and the United States or countries in the European Union, but also for the simplification of administrative and custom procedures, which encouraged the better circulation of goods and services and facilitated the dialogue between exporters and importers. It did not necessarily resume to the governments simplifying the procedures, but also direct actions in terms of promoting trade, including through diplomatic means.

The consequences of the trade liberalization wave to which Latin America participated during the 1990s had both positive and negative consequences. On one hand, the positive consequences are obvious. The countries in the region became involved in a mechanism at a global level that encouraged commercial trade, boosted revenues both for internal producers and the government and brought the Latin American products and goods on the EU and U.S. markets. At the same time, liberalization meant that products could enter the Latin American market as well.

It is interesting to see some of the negative consequences of commercial liberalization, this being in general connected with the incapacity of the local governments to properly manage the economical realities. Increased trade, including increased levels of import, meant that consumption would not only not be managed, but would be constantly encouraged until it could no longer be controlled.

Consumption is obviously a positive thing, but stops being so when it starts generating high levels of inflation and macroeconomic unbalances. With this in mind, the growing commercial relations with the EU and the U.S. brought about, even if indirectly, economic crisis like the one that Argentina experienced during the early part of 2002 and for which one of the factors responsible, the pegged currency, was in fact affected by the trade circuits as well.

Conclusions

Latin American trade followed a constantly ascending trend with its main partners, the European Union and the United States, starting in the early 1970s, continuing rather timidly during the 1980s, only to encounter significant growth rates during the 1990s and after 2000. While the governmental policies in place during the 1980s did not allow for such a commercial expansion, the liberalization that followed throughout the 1990s meant that the countries of Latin America began to open more and more and participate to the international flow of goods and services.

At the same time, although the obvious positive consequences of this liberalization process, there were also important setbacks deriving from the government's incapacity to manage appropriately the economic boom that also translated in higher volumes of trade. Macroeconomic imbalances and currency exchange problems translated into economic collapses, like the one that Argentina experienced during 2002.

The potential for growth in Latin America remains very high, which means that the trade volumes are likely to increase in the future as well. With Western companies outsourcing to Latin American countries and with new technologies in place, the trade structure is likely to change from primary products to increasingly more manufactured goods.