Latin America eyes opportunities from US-China trade war

Latin American authorities are keeping a close eye on the trade feud unfolding between the US and China, and are gearing up to fill any void left by the two economies.

“[The US tariffs on Chinese imports] is a huge opportunity for Latin America and its special economic zones [SEZs],” says Martín Gustavo Ibarra, honorary president of the Free Economic Zones of the Americas association.

Imports replacement

The White House announced tariffs on Chinese imports worth $150bn in early April 2018, targeting a wide array of goods, from steel to washing machines and solar panels.

Countries such as Mexico and Brazil now feature among those able to step in to replace Chinese steel and iron worth billions of dollars in the US imports matrix, Mr Ibarra said in a presentation at the Latin America Ports Forum held in Panama on April 11. Thanks to its North American Free Trade Agreement (Nafta) membership, Mexico is also in a position to replace Chinese imports of consumer goods such as televisions and air conditioning units, Mr Ibarra believes.

However, the region is now facing a competitiveness gap produced by Donald Trump’s iconic tax reforms, which cut the headline corporate income tax rate in the US to 21% and introduced major incentives for capital investment into the country. Major Latin American manufacturers such as Brazil or Mexico have corporate tax rates of, respectively, 34% and 30%, and seemingly little space to follow in the US’s footsteps in cutting corporate taxes. Against this backdrop, the benefits offered by the region’s hundreds of SEZs becomes even more strategic.

“The region has got 400 SEZs with favourable mechanism in terms of taxes, ease of business and external trade and infrastructure. These are the locations called [upon] to absorb the reshoring of those industries [from Asia],” Mr Ibarra says.

Trade rerouting

If the White House is focusing on direct US-China trade relations, Beijing is already deepening its trade footprint in Latin America to somehow reroute its exports to the US through the region.

“It can and will happen as long as China carries out investments in the country’s strategic industrial sectors such as electronics, pharmaceutical, steel and metalworks,” Jesús Orozco, managing director of Mexico's Pacific Lázaro Cárdenas port, said just a few days ahead of a mission of Chinese businessmen visiting the Lazaro Cardenas port in Mexico and its adjacent SEZ, exploring future business opportunities.

Yet the White House is renegotiating the Nafta agreement and pushing for stricter rule of origin rules preventing goods largely made in China and reprocessed to a lesser extent in Mexico to gain Nafta privileges. On the other hand, many other Central American and South American countries have free-trade agreements (FTAs) with the US, and no renegotiation is in sight in this case.  

“If [the White House] pulls the plug on $150bn of Chinese imports, what is Beijing going to do? They are going to look for countries with FTAs with the US and loose rule of origin mechanism. It’s nothing, new they did it with other countries such as Vietnam before,” says Mr Ibarra.  

China's inroads in Panama

The US’s renewed protectionism is not only creating space for China to intensify investment into manufacturing and logistics capacity in Latin America, but also pushing Beijing to increase its control of trade infrastructure right at the heart of the region's most iconic trade nexus, Panama.

“China’s growth tells us it is in a position to boost global trade,” says Luciano Fernandes, managing director of Panama’s maritime chamber. “On the other hand, the US has been losing the hegemony it used to have. The US’s influence in the region is diminishing, it is busy with other things, whereas China is investing much more in the region.”

Panama ditched Taiwan to re-establish diplomatic relations with China in 2017. Chinese investment has flowed in right away, with Chinese contractors investing billions of dollars in a new container terminal, a liquefied natural gas terminal and a tourist terminal in the proximity of the Panama Canal. Chinese investors are also proposing the development of a railway running north all the way to the border with Costa Rica, and perhaps on to the rest of Central America.

Yet the tensions between the Washington and Beijing will inevitably affect traffic along the Panama Canal, at least in the short term. The US and China account for 86.6% of total traffic through the canal. “They are our greatest partners,” says Oscar Bazán, vice-president of the Panama Canal Authority.

“Whatever happens in trade between the two of them is very important for Panama,” says Mr Bazán, who hints at a possible setbacks for the canal from the ongoing trade feud. “However, we haven’t seen any impact yet.”