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International Molding Report: Is Latin America right for you now?

February 1, 2003

12 Min Read
International Molding Report: Is Latin America right for you now?

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This report is prepared for IMM by Agostino von Hassell of The Repton Group, who provides IMM’s monthly Molders Economic Index.

The economic news out of Latin America—mostly Argentina and Brazil—has been rather grim with Argentina’s economy in a full-scale meltdown. But it now appears that with Argentina’s recent default on its debt, the economy has finally reached bottom. Brazil, the largest single economy in Latin America, still has plenty of downside.

Still, now may be the time for injection molders to look at those markets, not only as possible export targets, but also more importantly as attractive locations. Is now the time to buy existing molding operations on the cheap and position yourself for the upswing?

Evaluating foreign investment opportunities involves the tricky task of assessing the political and economic future of many historically volatile nations. Latin America is no exception to this rule. Despite the difficulties, several factors can be used to gauge the likely political and economic prospects of the region. One important indicator is the existing and planned trade agreements that crisscross this region.

One cannot evaluate economic prospects in Latin America without considering the various trade agreements designed to reduce tariffs and other trade barriers. Plastic goods that are manufactured and exported from Latin America can benefit from these trade agreements.

These agreements have a direct impact on products you can ship from the U.S. or from a Latin American country to the U.S. They include collective treaties like the North American Free Trade Agreement (NAFTA), bilateral free trade and investment treaties, and unilateral agreements along the lines of the Andean Trade Preference Act (ATPA), the Caribbean Basin Initiative (CBI) or the General System of Preferences (GSP). All these agreements offer export benefits for companies manufacturing in Latin America.

After NAFTA, which has expanded intramember trade by more than 109 percent since its implementation in 1994, the most significant attempt to liberalize trade has been the proposed Free Trade Area of the Americas (FTAA). FTAA negotiations began in 1998 and are scheduled to be completed by Jan. 1, 2005. The final agreement hopes to eventually eliminate internal tariffs within Latin America.

The current round of negotiations, which began on Nov. 1, 2002 in Quito, Ecuador, are cochaired by the U.S. and Brazil. U.S. Trade Representative and State Dept. officials have expressed their confidence that the FTAA will be completed by 2005; however, most officials speculated that the initial agreement would probably contain various exclusionary clauses. Similar to NAFTA, there has been no indication that plastics will be left out of any future agreement.

The Andean Trade Preference Act (ATPA) and the Andean Trade Promotion and Drug Eradication Act (ATPDEA) are unilateral trade agreements that the U.S. has voluntarily extended to the Andean nations of Colombia, Ecuador, Peru, and Bolivia. The ATPA took effect in 1991 and was later expanded under the ATPDEA, in August 2002. Neither the ATPA nor ATPDEA have any apparent exclusions or limitations on plastic goods.

The Caribbean Basin Initiative/Caribbean Basin Economic Recovery Act (CBI/CBERA) and the Caribbean Basin Trade Partnership Act (CBTPA) are also unilateral trade agreements extended to many Caribbean and Central American nations, with the obvious exclusion of Cuba. The U.S. is the region's largest export market, while also representing the fourth largest market for U.S. goods. The CBTPA has no obvious exclusions or limitations on plastic products.

The General System of Preferences (GSP) began in January 1976, and is designed to continue until Dec. 31, 2006. The GSP extends trade preferences in the form of lower tariffs to products manufactured and exported from less developed nations. All Latin American nations qualify for GSP benefits except Cuba. CBI and ATPA preferences exceed the benefits under GSP. Unlike the other two unilateral agreements, the GSP has qualifications and annually calculated limits. Again, all trade preferences under these initiatives will also extend to Canadian and U.S. companies manufacturing and exporting from this area.

The U.S. Chile Free Trade Agreement has been in the works for several years. However, with the President's new fast track authority and a Republican majority in Congress, the most recent estimates are that the agreement will be signed by early spring 2003, and will clear Congress by fall 2003. According to USTR officials, market access disputes (the U.S. has been slow to open full agricultural and textile access to Chilean businesses) have held up the negotiations. Market access issues have not included any disputes over plastics.

Latin American trade unions offer producers expanded duty free markets. The Andean Community, MERCOSUR, and the Central American Common Market (CACM) represent three of the most important Latin American customs unions. Each of these customs unions have greatly diminished or even eliminated internal tariffs (as in the case of the CACM) and have increasingly organized common external tariffs. Labor and environmental issues are generally still left to the regulation of individual states.

Plastics manufacturers can capitalize on these trade agreements and customs unions. As internal Latin American markets liberalize and expand, and as export markets become increasingly free throughout the region, U.S. and Canadian companies stand to benefit from early investment. To date, the trade-liberalizing trend has not generally included Europe or Asia. Outside of an agreement between Mexico and the European Union, no collective trade agreements have been signed between Latin American and outside markets. Therefore, regardless if the FTAA is fully operational by January 2005, it is already clear that the overwhelming economic trend is for more extensive and freer trade within the Americas.

salesandmarketing (7K)Political and Economic Concerns
An analysis of the existing political and macroeconomic climate within the individual Latin American nations is a necessary step when considering long-term investment. While Latin America no longer poses the same degree of economic and political problems of earlier decades, risks still exist. Many countries have been reluctant to fully open their economies and to impose the required economic reforms to ensure safe investment. Corruption and a lack of transparency remain serious problems.

Furthermore, although the newly developed civil society in Latin America was predominantly a beneficial development, it was also used to help to organize those forces that opposed liberal economic reform. While the political and economic changes of the 1980s and 1990s were positive, some troubling problems remain. For this reason a brief review is in order.

  • Brazil.

Officials from the Dept. of Commerce, the State Dept., and the Office of the U.S. Trade Representative (USTR) have expressed concern that the new Lula administration may hinder the current round of the Free Trade Area of the Americas (FTAA) negotiations and retard liberal economic reform. The president seemed to justify these anxieties during his campaign when he characterized the FTAA as a U.S. plot to economically annex Latin America.

However, despite these serious concerns, members of the Brazilian U.S. Chamber of Commerce, the Brazilian Congress, and Brazilian scholars in Washington, DC have generally speculated that the new administration will continue to honestly pursue an FTAA agreement and maintain a fiscally responsible budget. As Brazil’s economy depends on international trade and conservatives currently control the Brazilian Congress, this would appear to be a safe assumption.

Regardless of President Lula’s stance concerning the FTAA agreement, his administration faces several troubling economic problems: an economically crippling social security system that currently eats up around $47 billion annually, rampant political corruption, a consistently low ranking on the Cato Institute’s Economic Freedom of the World Annual Report, and a highly protected industrial sector. A majority of the sources interviewed for this story have speculated that Brazil will remain reluctant to seriously lower its industrial tariffs. Some Latin American experts have even suggested that Brazil’s position on industrial tariffs might prevent it from signing an FTAA treaty in 2005.

Aside from these macro problems, Brazil’s plastics mold market remains highly protected, often making imports noncompetitive. Direct foreign investment in Brazilian firms remains an option, but highly protected labor policies make output unreliable. MERCOSUR customs union has expanded the internal market, but Argentine economic woes have limited these economic benefits. In general, Brazil has an active plastics industry represented by several industry unions and associations: the Brazilian Assn. of Laminated Plastics & Flexible Foams Industry (ABRAPLA), the Brazilian Plastics Industry Assn. (ABIPLAST), and the Plastic-Material Industry Union (SINDIPLAST).

  • Argentina.

November’s announcement that the government would default on its debt marks a new—but not particularly surprising—low point for this struggling South American economy. While the U.S. is unlikely to step in, most experts believe the country will eventually win a rescheduling agreement with the International Monetary Fund.

Regardless of whether or not a new debt agreement can be reached, Argentina already faces enough economic problems. Most U.S. Dept. of Commerce, USTR, and U.S. Embassy specialists agree that even if economic deterioration is stopped, the Argentine recovery will likely proceed at nothing more than a slow to moderate pace.

Furthermore, Argentina has yet to see strong political leadership emerge from this chaos. While the Argentine business community and the majority of Argentine Congress members predict that former President Carlos Menem will win March’s elections, Menem does not yet have majority support within either group. Underlying these problems are a general lack of political transparency, pervasive corruption, and an unemployment level that now exceeds 20 percent, all of which virtually guarantee that Argentine politics will remain dangerously volatile.

Argentina’s plastics industry was initially hurt by the auto industry’s migration to Brazil and is generally overshadowed by the larger and more technologically advanced Brazilian manufacturers. However, if the country’s deep economic and political woes improve, foreign investment would most likely find good deals in capital, and a developed industrial infrastructure.

Similar to Brazil, Argentina also possesses a well-developed plastics industry, represented by Camara Argentina de la Industria Plastica, its largest plastics association. The vast majority of Argentina’s plastics production avoids most duties because it is exported to other MERCOSUR members and associate members. Less than 5 percent of Argentine plastic is exported to the U.S.

  • Chile.

Chile has the most politically stable and economically healthy government in South America and is continually ranked at the top of the Cato Institute’s report. Despite some conflict regarding U.S. market access during recent negotiations in Atlanta, all Dept. of Commerce, USTR, and State Dept. specialists interviewed agree that a signed treaty is likely by spring 2003. To date, the government has been extremely successful in lowering its own trade barriers and in negotiating trade agreements with other western hemisphere countries, including Canada, Mexico, the countries of the Central American Common Market (CACM), the Andean Community, and MERCOSUR.

Politically, the Chilean government has made a remarkably successful democratic transition from the old Pinochet regime and shows no serious signs of weakening. Just as important, Chile’s government does not share its Andean neighbors’ problems with drugs or insurgency groups.

Throughout most of the 1990s, Chile’s real growth rate averaged around 8 percent, and despite a short recessionary period starting in 1998, Chile is again showing signs of growth (5.4 percent in 2000 and 3.1 percent in 2001). Inflation has remained low, and the Chilean peso has been relatively stable compared to its neighbors (see Table 1). Unemployment has remained high at around 10 percent.

Chile also has a well-developed plastics industry represented by the Asociacion Gremial de Industriales del Plastico de Chile.

  • Other South American nations.

The remaining South American nations should be excluded from investment consideration because of tumultuous economic, political, or social problems. For example, Bolivia, Peru, and Ecuador suffer from labor and social movements that have routinely brought their national economies to a halt. Paraguay has a predominantly rural and underdeveloped economy. Peru and Ecuador have a developing narco-insurgency problem and Colombia has struggled with guerrilla and paramilitary movements for decades. The leftist regime of President Hugo Chavez in Venezuela has alienated the business community and thrown the economy into a tailspin. Political leaders or parties critical of neoliberal reform have found popular support in Bolivia, Peru, Ecuador, Brazil, or Venezuela.

Investment Bright Spots
Central America appears to offer some of the most promising investment opportunities in the Latin American market. The CACM is less industrially competitive than its South American and Mexican neighbors, but the internal consumer market is nonetheless extensive, estimated at more than $36 million. Investors benefit from duty-free internal trade, access to economies like Costa Rica (which boast relatively high levels of economic freedoms and stable currency rates), and cheap labor markets.

Additionally, investors benefit from existing free trade agreements with Panama, the Dominican Republic, Mexico, Chile, Colombia, Venezuela, and the U.S. Outside of the CACM, Panama offers the benefit of an existing bilateral investment treaty with the U.S., a stable currency, friendly banking laws, and easy access to transportation.

Politically, the region has recovered from two decades of intense Cold War turmoil, and all CACM members have operating democracies and open economies. While corruption remains a problem in Central America, like all of Latin America, the CACM and existing free trade agreements have increased transparency and lessened the impact of corruption. More importantly, there has been less of a backlash against neoliberal reforms in Central America, as migration and remittances from the U.S. have helped to soften the severe social costs of economic liberalization. Central American trade experts predict that a permanent bilateral free trade agreement between the U.S. and CACM will probably be the next major agreement after the U.S./Chile agreement is concluded. Central America is currently the fourth-largest market for U.S. goods and has a well-established U.S. business community.

Going Forward
Latin America offers the potential of a consumer market estimated at more than $400 billion, an established network of interconnecting free trade agreements, low labor costs, easy access to export markets, and foreign-friendly governments.

However, while the politically charged tinderbox of the 1970s and 1980s may be a memory, many Latin American nations are struggling with new civil and economic challenges, which may be risky to investors. In Colombia, Bolivia, and Ecuador, for example, public backlash against some of the harsher social effects of neoliberalism has threatened the advances made during the 1980s and 1990s. Despite these challenges, as Latin American free trade agreements expand, investors can direct their investments toward safe areas, while accessing the wider markets of the entire region. This cautious approach should be the strategy of today’s investors.

Contact information
The Repton Group
New York, NY
Agostino von Hassell
(212) 750-0824
[email protected]

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