Summary:
· Trade in goods between the European Union (EU) and Latin America and the Caribbean (LAC) is relatively stable (in value terms). However, China has overtaken the European bloc, which is now only LAC’s third largest trading partner.
· The EU is the main investor in the region. Its investments are diversified and increasingly concentrated in high value-added sectors (new technologies, telecommunications, renewable energies, etc.).
· The strong presence of the Latin American and Caribbean diaspora within the European bloc (mainly in Spain) makes the EU the second largest source of remittances to LAC.
· The EU plays an important role in the region in the face of US protectionism and the rise of China, on which Latin American and Caribbean countries are increasingly dependent. The European bloc’s strategy has been to pursue an active policy of negotiating trade agreements.
Historically, the European Union (EU) has played a leading role in Latin America and the Caribbean (LAC). It is the region’s largest investor and third-largest trading partner. However, recent years have been marked by the emergence of China, which has steadily strengthened its economic relations with Latin American countries, while the United States appears to have turned away from the region (protectionist retreat). These major geostrategic upheavals lead us to reflect on the role of the European Union in the region, at a time when the EU-Mercosur (Brazil, Argentina, Uruguay, and Paraguay) treaty is currently being ratified.
1. The European Union (EU) is LAC’s third largest trading partner
The EU is currently LAC’sthird largest customer andthird largest supplier. It accounts for 9.8% of the region’s exports (vs. 12.1% in 2010) and 13.3% of its imports (vs. 13.8% in 2010). Bilateral trade in value terms has remained relatively stable since 2013.
The Netherlands, Germany, and Spain are the three main European customers.
Nevertheless, the EU has lost ground to China over the last decade. The Asian giant has become the region’s second-largest customer (growth in demand for raw materials) and second-largest supplier (upmarket Chinese products competing with European exports).
The LAC’s trade balance with the EU has been in deficit since 2008 (-€35 billion in 2019 compared to -€55 billion with China). Of the forty countries in the region, fifteen have a surplus and twenty-five have a deficit. Brazil and Venezuela have the largest trade surpluses (€20.8 billion and €15.8 billion) thanks to their exports of raw materials, while Mexico and Chile have the largest deficits (€28.3 billion and €2.2 billion).
Figure 1: LAC-EU trade in goods (€ billion)
Source: Trademap (International Trade Centre (ITC), a joint agency of the World Trade Organization and the United Nations)/ Prepared by: BSI Economics
At first glance, LAC exports to the EU appear to be relatively diversified. In 2019, the ten main categories of products exported by LAC accounted for only 56.6% of its exports to the EU (vs. 91.7% to China and 74.3% to the US) (see Table 1). However, these are mainly raw materials and their derivatives ( 75%), although automobiles, maritime and river navigation products, and electrical appliances and machinery also account for a significant share.
Table 1: Share of the main categories of goods exported by the LAC
*The product categories correspond to two-digit customs codes
Source: Trademap and ECLAC/ Prepared by: BSI Economics
2. The European Union is the main investor in LAC
The European Union is the main investor in the region. In 2018, it accounted for 74% of FDI inflows in Brazil, 44% in Colombia, and 35% in Mexico. In terms of FDI stock, five of the top 10 investors are EU members (the Netherlands (No. 2), Spain (No. 3), France (No. 6), Germany (No. 7), and Italy (No. 8)).
Beyond the amounts, it is interesting to analyze the sectoral distribution of these FDI. EU investments are much more diversified than Chinese investments. During the period 2005-2017, the Old Continent’s greenfield FDI portfolio (new projects) evolved significantly in favor of high value-added sectors:
–The share of renewable energies rose from 3% to 26%. Spain accounted for 48% of EU greenfield FDI in LAC, followed by Italy (10%) and France (10%).
–The telecommunications sector grew significantly (from 16% to 32%).
–The automotive sector remains significant (averaging 12% over the period). Germany accounted for 54% of EU greenfield FDI in this sector (Italy 19% and France 12%).
–Raw materials extraction industries fell from 43% to 14%.
As a result, the European Union is a strategic partner for the region in high value-added sectors. It alone accounts for 65% of greenfield FDI in renewable energies and 68% of investment in new research and development projects. The European bloc also has a strong presence in the new information and communication technologies sector (see Table 2).
Table 2: Mergers and acquisitions in the high-tech sector in LAC (% number of transactions carried out between 2005 and 2018).
Source: Trademap (International Trade Centre (ITC), a joint agency of the World Trade Organization and the United Nations) and Economic Commission for Latin America and the Caribbean (ECLAC) / Prepared by: BSI Economics
In addition, in 2017, there were nearly 4.5 million Latin American and Caribbean immigrants living in the EU, 52% of whom resided in Spain[1]. This immigration represents a significant source of income for the region. In 2017, remittances from these immigrants to their countries of origin reached USD 7.4 billion (58.4% from Spain), far behind the US (USD 61 billion) but well ahead of China (USD 208 million).
3. Prospects for bilateral relations
The European Union has been slow to recognize the scale of China’s emergence in Latin America and the Caribbean. The Asian giant’s move upmarket is increasingly competing with its exports. The elasticity of substitution between European and Chinese products is increasing. However, EU-LAC relations are not destined to disappear.
Firstly, the United States’ lack of interest in the region is reshuffling the deck. For example, the world’s leading power has withdrawn from the Trans-Pacific Partnership Agreement, to which several Latin American countries (Colombia, Chile, Mexico, and Peru) were signatories. At the same time, LAC is becoming increasingly dependent on China (commercially and financially), hence the importance for the region of maintaining a strong relationship with the EU.
It is in this context that the European bloc has been pursuing an active policy of negotiating trade agreements for several years. It has negotiated agreements with 33 countries in the region, compared with only 11 for the US. The most important (currently undergoing ratification) was concluded with Mercosur (Argentina, Brazil, Paraguay, and Uruguay), which in 2019 represented a population of around 260 million, a GDP of more than €2.2 trillion, and European FDI stock of €365 billion in 2017. A new agreement with Mexico was also concluded in 2018. This strategy should strengthen bilateral relations through lower customs duties, the reduction of non-tariff barriers (simplification of customs procedures), better access to public procurement markets, etc.
Finally, although the European Union and China are competitors in the Latin American market, they can play a complementary role:
–Trade agreements with the EU could help Latin American and Caribbean countries improve their production standards. This is a major challenge for the future of LAC exports to China, in order to respond to the diversification of demand and the growing demands of the Chinese middle class. Improvements in sanitary and phytosanitary standards and traceability promoted by the EU-Mercosur agreement will be particularly important in enabling the region to take advantage of the increase in Chinese demand for exotic fruits and meat products, to name but a few.
–The new trade agreements concluded between LAC and the EU include chapters on the rights of indigenous communities, wildlife management, reforestation, etc. Conversely, China does not integrate sustainable development issues into its relations with the region.
–Despite the diversification of Chinese investments, they remain relatively more concentrated in the primary sector, while the European bloc favors sectors with higher added value and higher standards.
Conclusion
The European Union has lost ground in Latin America and the Caribbean (LAC) but remains the region’s third largest trading partner and leading investor. Its trade and, above all, financial relations are much less dependent on the primary sector than is the case with China-LAC relations. A growing share of European FDI is concentrated in high value-added sectors such as renewable energy and telecommunications.
Furthermore, thanks to the large Latin American and Caribbean diaspora, particularly in Spain, remittances from the EU are high, while those from China remain marginal. To strengthen its ties with the region, the European bloc’s strategy has been to sign numerous trade agreements. Beyond the traditional benefits (lower customs duties and reduced non-tariff barriers), these agreements are pushing LAC countries to improve the quality and standards of production while taking into account sustainable development issues.
Bibliography
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