Latin America Needs More Home-Grown Supply Chains

The Union of South American Nations (UNASUR) — an organization that once aspired to become South America’s answer to the European Union — quietly faded away last month. Deep divisions over Venezuela’s turmoil and internal leadership battles precipitated its demise. Yet its real vulnerability stemmed from something deeper: the economic isolation of its members. Unlike the European Union, Latin America’s multilateral bodies haven’t ignited commercial ties between their participants. This economic detachment not only doomed UNASUR, but has held the region back, and may keep it on the margins in the decades to come.

UNASUR wasn’t the first attempt to integrate Latin America. In the 1960s the six-country Latin American Free Trade Association fell victim to protectionism. In the 1980s, a dozen nations tried again with the Latin American Integration Association, largely to no avail. In the 1990s Mercosur took center stage as a vehicle to knit South America together: Its common currency never materialized, and trade between the partners peaked shortly afterward, then again declined.

Despite more than a dozen different multilateral organizations, Latin American nations remain commercial strangers. Sure, Argentina and Brazil exchange some auto parts, Colombia and Ecuador do a decent trade in paper and plastics, and Chilenos watch Mexican soap operas. But overall, less than 20 cents of every export dollar goes to one of its neighbors. Compare that with well over half of international sales in Europe or Asia. More broadly, Latin America’s regional agreements have done little to boost their members’ share of world manufacturing exports and their participation in global markets.

Importantly, Latin American nations tend not to make things together. Today the vast majority of goods circling the earth are intermediary goods — parts and components being sent elsewhere to be sewn, welded, stamped, and otherwise assembled into clothes, cars, computers and thousands of other products. This shift in trade reflects the rise of global supply chains, as everyday products are increasingly made across numerous factories and even countries.

These supply chains have bolstered the fortunes of many emerging markets — mostly when they worked with their neighbors. Asia’s big four newly industrialized economies — South Korea, Taiwan, Hong Kong and Singapore — jump-started their decades of near double-digit growth with Japanese outsourcing and investment. They later benefited from China’s rise. Many Eastern European nations saw their industrial base and larger economies blossom when their Western European brethren poured in after the fall of the Berlin Wall. And Mexico’s successes in cars, planes, medical equipment, and other manufacturing has been due mostly to the commercial ties born of NAFTA.

Latin American nations are instead largely focused on mining the iron ore, lithium, copper and other raw materials that go into the making of steel, batteries, and electronics; or growing the soybeans, fruit, and coffee processed and consumed oceans away.

Excluded from the most dynamic parts of international manufacturing chains, Latin American companies and workers are less likely to gain access to new technologies, to develop new skills and to move up the value-added ladder to higher-margin products and better-paying jobs. This isolation leaves the region less able to compete vis-a-vis other parts of the world in the making of things — not least because of the rise of other more successful regional hubs — and less able to attract global consumers to its homegrown brands. It helps confine so many nations to the middle-income trap.

Without the commercial ties to keep the politics on track, diplomatic conflicts often lead either to neutered talk shops unable to resolve pressing issues — the Organization of American States’ response to Venezuela comes to mind — or to full-on institutional suspensions, a la UNASUR.

Given the distances involved, South America is unlikely to be drawn into Asia’s, Europe’s or North America’s manufacturing orbits. Its nations instead should turn to their neighbors to nurture industry and boost economic growth.

The legal mechanisms are there: More than two dozen regional agreements cover some 80 percent of trade. These could be expanded to include the thornier sectors that remain, and could and should be consolidated into a few broad agreements — for instance, expanding the Pacific Alliance to streamline the current thicket of rules and regulations.

Governments could also make it easier for international companies to invest through tax and investment treaties with neighbors. They could tackle the outsized transaction costs shippers face from woeful infrastructure between countries. And they could reduce excessive red tape and strengthen the rule of law, enticing to any foreign investor or multinational.

If Latin American entrepreneurs and businesses looked next door more often, they would finally provide a stronger economic foundation for the wider integration politicians have long discussed but never realized.

View article originally published on Bloomberg.