Latin America — America’s Backyard Frontier
By Kathleen Brush, Ph.D.
The International Monetary Fund’s regional growth forecasts for 2013 have just taken a haircut. For the United States its 2.1 percent, for the EU it’s 0.5 percent, China 8.2 percent, and Latin America 3.9 percent.
These numbers indicate that China is the odds on favorite again for expansion. Maybe it is for countries in China’s backyard, but America’s backyard holds greater promise for American businesses.
The GDP growth forecast for Latin America may be 3.9 percent but imports are expected to rise 8.1 percent. This isn’t the first year imports are outpacing GDP growth in Latin America. In 2010 and 2011 import growth outpaced GDP growth by more than 200 percent. What is really great about this appetite for imports is that Latin America is a fan of American imports. (China actually prefers imports from its Asian neighbors.)
Selecting the Best Opportunities
Where are the best opportunities for Americans to export products? It’s the countries that are: (1) receptive to American products; (2) that create environments where American products will be competitive; and (3) that make it easy for the US to export.
The United States may have a giant trade deficit, but it generally runs trade surpluses with many countries in Latin America, including Brazil, Argentina, Peru, Chile, and several countries in Central America. That’s a good sign of receptivity. So is growing demand. Barring the Great Recession blip, U.S. exports to Latin America have been on the rise for years. Exports to Mexico, which are twice the volume of exports to China, have risen by 204 percent since 2003. In the case of Chile they have risen nearly 600 percent, Brazil 400 percent, and Peru 500 percent.
With the exception of Brazil and Argentina, the United States has free trade agreements (FTAs) with all of these countries. FTAs with negotiated lower tariffs and non-tariff barriers help American products to be competitive and they simplify the requirements for export. The United States also has FTAs with Mexico and Colombia where it has been running trade deficits, but the United States runs deficits with all of nations that are on its top 10 oil imports list. Eliminate the oil, and the United States would be running a surplus with these two countries, too.
It may be that Latin Americans not only like U.S .products, they like doing business with American companies. Trade is 42 percent more likely when trading partners share a common language. English may be the national language in the United States, but 12 percent of Americans speak Spanish fluently. The countries that trade the most also share common values. The two regions of the world where Christian values are the most widely held are North America and South America. It’s also easier to do business with countries in the same time zone and when transportation costs and times are compressed.
There are a few things to keep in mind when contemplating business in Latin America. Buying power is much lower than the United States. This is reflective of lower levels of economic development. This has a lot of implications such as immature roads and highways, underdeveloped legal and financial systems, lower educational levels, and different levels of needs and wants. Needs and wants are also influenced by income. Chile, Uruguay, Brazil, and Argentina, with per capita incomes between $11,000 and $14,300 have the highest incomes in this region. Per capita incomes in Central America range from $1,243 in Nicaragua to $8,500 in Costa Rica.
There are also many countries in Latin America where: social unrest still percolates; intellectual property rights are not respected; with the exception of Chile, Uruguay, and Costa Rica, corruption can be eye popping; levels of danger are considered very high. Five of the top 10 highest homicide rates in the world are in Latin America: four in Central America, and in Venezuela.
It’s common for people to instinctively think of market size as a primary criterion for selecting which countries to target. If this were the case, Brazil, as the sixth largest global economy, would be very attractive. This has to be balanced against Brazil imposing one of the world’s heaviest burdens of both government regulations and trade tariffs. Argentina as the third-largest Latin American market would be at the top of the big market size list too, but inflation has been reported more than 20 percent, and the government has been implementing protectionist measures that could easily spoil the best laid plans for exporting to Argentina.
The best way to avoid problems with unpredictable tariff and non-tariff barriers, and other regulatory hurdles is to select countries where the United States has a free trade agreement. Mexico, the 14th largest economy in the world, is the largest Latin American country that has an FTA with the United States. It also shares a common border with the United States. Colombia is the next largest. Chile is about 25 percent smaller than Colombia but it has the highest per capita income in Latin America. It is also considered the easiest country in Latin America to do business. Peru is the next largest of the FTA countries. Less than 5 percent the size of Mexico, Costa Rica and Panama in Central America are also attractive because they are among the easiest countries in Latin America for doing business, they are considered the safest in Central America, with the exception of poor but safe Nicaragua, and their per capita incomes are the highest in Central America.
The simplest way for an American company to expand into the attractive opportunities of Latin America is through export. The start-up costs are low, risks are low, danger is minimized, and rewards can be high. The key to high rewards is selecting the right country markets for a company’s products and then carefully selecting a reliable trustworthy in-country partner. Remember legal systems are underdeveloped, so relationships rather than contractual provisions will determine what gets done. Exporting should be attractive for another reason. According to the U.S. Department of Commerce for every $500,000 of goods exported a firm creates three jobs. That’s good for America, too.
International Business Consultant, Kathleen Brush, PhD, MBA, has been CEO and president of several global companies during the last 20 years. She’s interviewed regularly on topics of global politics, economic development, and international business leadership on Fox News, CNBC, Fox Business News, PBS, in The Washington Post, Bloomberg BusinessWeek, Entrepreneur, World Trade Magazine and more.
Brush is the author of the new CEO leadership book, The Power of One and can be reached at www.kathleenbrush.com/.
Illustration by Stuart Miles at Free Digital Photos.net