Finance & Markets / July 16, 2020

Latin American Trade: Economic Cooperation Shows Strength

Home to over 400 million people, the diverse nations of Latin America and the Caribbean (LAC) cooperate economically in many ways. Trade blocs have served as the primary interstate cooperation method in the region and are helping to integrate the region’s economies further. Primarily composed of emerging markets, Latin American trade is strengthened by the integration and development that results from trade blocs.

Participants of LAC Cooperation

The Latin American Free Trade Association (LAFTA), founded in 1960, was the first free trade agreement between LAC nations. In 1980 LAFTA reorganized into the Latin American Integration Association (ALADI), deepening their commitments to the process of economic cooperation. The Food and Agriculture Organization of the UN is working closely with ALADI to elevate agriculture SMEs in Latin America, noting that more than 80% of food production in the region comes from family farmers.

The Latin American and Caribbean Economic System (SELA) was founded in 1975 and still serves as the most inclusive economic body in the region, with every state in LAC holding membership. It handles bilateral and multilateral negotiations between member states and provides a basis for cooperation for international investment and interest in the region. SELA is focusing on a sustainability plan for its members, with the permanent secretary of the organization recently stating that “It seems that there is no better choice for sustainable growth. There is widespread consensus about the fact that the coal-based economy is reaching its limit.”

 

 

One of the most significant economic blocs in the region is the Southern Common Market, more commonly referred to as MERCOSUR. With a GDP of nearly $4.6 trillion as of 2019, this bloc is the 5th largest economy on Earth when considered as a single unit. This sizeable common market has proven attractive to foreign investment in sustainability projects. The EU signed a free trade agreement with MERCOSUR in June 2020 and is currently the most significant participant in the trade bloc, having invested €365 billion as of 2017. This agreement also focuses on sustainable principles, including biodiversity, combating illegal logging, and reducing greenhouse gas emissions. 

 

 

In 2011 the states of Chile, Mexico, Colombia, and Peru formed the Pacific Alliance. The organization focuses on decreasing shipping costs between Pacific-facing nations and their Asian counterparts. Initial data suggests that a 10% decrease in shipping costs would raise export rates by as much as 45% in Chili and 13% in Mexico. The Pacific Alliance also focuses on the impact of climate change on commercial activity, reaffirming this position in the recent 2019 Summit. This dedication to climate change and sustainability make the Pacific Alliance an excellent candidate for ESG investment.

The Benefits of Cooperation

Cooperation Latin American trade blocs has opened new worlds of opportunity for both member nations and foreign investors. These diverse organizations and agreements have led to a 64% increase in intra-regional trade since their inceptions, highlighting the latent potential of interstate cooperation. While 90% of commerce within LAC is already tariff-free, additional annual benefits of 3.5%, amounting to $11.3 billion, are possible by eliminating intra-regional tariffs.

The cooperation fostered within LAC via trade blocs extends beyond finance and engages complex topics like curving greenhouse emissions in emerging markets. To tackle this subject, Chile, Brazil, and Colombia have issued national climate bonds to curve emissions. The issuances of these bonds increased three-fold in LAC between 2018 and 2019. Given that climate change is one of the most critical issues of this century, these efforts demonstrate a clear trend toward sustainable development within LAC.

With an estimated $1 trillion in low-carbon investments by 2040, there are massive ESG investment opportunities within the region. This green FDI presents excellent synergy with the average LAC investor. A whopping 62% of respondents stated that ESG investments are essential to their portfolio. With the World Bank announcing that they will consider ESG in their fund offerings, this socially conscious mindset further serves to differentiate LAC as a jewel of sustainable investing opportunity.

Interstate cooperation is a complicated subject that LAC has approached in a variety of ways. The existing trade blocs in the region serve the diverse interests of the nations that comprise it. This diversity and flexibility have translated to resiliency in LAC’s climate change approach. Sustainable investment opportunity in the region offers investors the chance to impact both people and the planet positively.

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