Germany, Austria and Switzerland, often referred collectively to as DACH, have a long commercial relationship with Latin America. Some DACH companies established themselves in LatAm over a century ago. In fact, German Hanseatic Cities were already active traders with Brazil in the early 19th century. Germany is a leading trade partner in each of the biggest LatAm economies and Swiss’ investments rank amongst the largest in countries like Colombia. In spite of LatAm volatility since the 1980s, most large and medium-sized DACH companies remained continuously engaged in the region.
Exports and investment into LatAm follow different patterns and will be impacted in 2019 in different ways by the sweeping changes taking place in the region:
- The North American Free Trade Agreement -NAFTA has been renegotiated and renamed U.S., Mexico, Canada Agreement or USMCA. Its passage in the U.S. Congress remains questionable in light of Trump’s loss of congressional support in the November 2018 mid-term elections.
- Mexico’s political spectrum has turned leftward, challenging many of the assumptions of investors in a market responsible for 70% of Latin America’s manufacturing exports.
- Jair Bolsonaro brings a new political tone to Brazil, challenging many of its traditional social norms and political economy. Neoliberal reforms may finally transform the Brazilian economy, the only major economy in Latin America to evade substantive reform over the last thirty years.
- Colombia has a new (and politically untested) centre-right leader who faces a very challenging environment in Colombia with continued low oil prices, a tenuous peace, rising drug production, and growing left wing populism but who is committed to attracting investment and fostering trade.
- Argentine voters remain highly divided over which direction to follow between two stark choices: leftist populism versus orthodox neo-liberalism. 2019 will prove to be fundamental in deciding which direction Argentina follows after elections conducted later this year.
- In Peru, a ten-year corruption scandal where Brazil’s Odebrecht financed as many as three different political campaigns has discredited several leaders, leaving a formerly unknown Vizcara as president and a renewed anti-corruption political norm. Billions of foreign investment dollars are now poised to move into Peruvian infrastructure projects.
What Does This All Mean for German, Swiss and Austrian exporters in 2019?
Trade flows between Latin America and German-speaking countries are relatively low. As an example, only 2.6% (US$ 36.9 billion) of German commodity exports and 2.2% (US$ 6.6 billion) of Switzerland’s were shipped to LatAm in 2017, according to the UN Comtrade database. LatAm’s share of Austria’s exports for 2016, its most recent available year, was only 1.9% (US$ 3 billion).
Over the years, this proportion has not changed much, and Latin America remains a less frequent destination for DACH’s goods than the Middle East and North Africa. The main destination of Swiss German and Austrian exports are by far other European countries (66%), followed by East Asia (14.6%) who over the last decade overtook North America (Unite States and Canada) as second largest foreign market for their products. China, with the raise of its manufacturing industry, has been a magnet for Germany’s machinery and was the number three destination of German exports in 2017, after the U.S. and France. The graph below shows where DACH exports go, with the thin gray line representing the volume of goods shipped to Latin America.
Mexico and Brazil are, not surprisingly, the predominant trade partners for DACH markets in Latin America. These two markets received 63% of all exports to the region from Germany, Switzerland and Austria in 2016. Argentina, Chile, Colombia and Peru receive together a further 24%.
Given the opportunities in Asian and US markets, Latin America is not deemed a priority by most German exporters, but 2019 provides new opportunities worth exploring.
Latin America’s middle class has doubled in size over the last decade and will continue growing in 2019 as a result of demographic change (fewer children, more working mothers), strengthening currencies, investor appetite in Brazil, Chile, Peru and Colombia, and pro-business investment climates in most markets. Close to 600 million consumers earn $10,000 per capita but 200,000 of them have purchasing power closer to that of Portugal. Latin America looks to Europe for both luxury and mass marketed consumer goods.
Changing Trade Agreements
Mexico recently concluded 18 months of negotiations with the U.S. and Canada and reached a landmark USMCA trade agreement. Known as “T-MEC” in Spanish, the accord (once ratified by the U.S. congress) will set new rules for the auto-manufacturing sector that directly impact German vehicle and auto-parts manufacturers. For a car to be exported duty-free to the U.S. it must originate in at least 75% of its components from within the three countries. Auto-parts manufacturers in Asia and Europe will need to squeeze into the remaining 25% or manufacture in Mexico, Canada or the U.S. Furthermore, 40% of a car must originate from factories that pay a blended average above 16 USD per hour. This measure is a win for North American manufacturers that want to keep cheap Asian parts at bay, a win for Donald Trump who may induce more manufacturing capacity expansion in the U.S., for Andrés Manuel Lopez Obrador who aims to raise wages for Mexican workers.
Ratifying the USMCA will prove challenging in the U.S., where 40+ new Democrat party congress men and women were elected to weaken President Trump’s power. Handing him a win by ratifying the agreement is anathema to their political goals. We can expect several months of (continued) brinkmanship between Trump and congress over USMCA, until the Trump threat to pull out of NAFTA forces a rare moment of Washington pragmatism and the agreement is passed. Of course, such an inherently optimistic prediction may change course if U.S.-China trade relations fall apart.
By 2020, there is a good chance that the free trade agreement between the European Union and the Southern Common Market -Mercosur will move forward. After 19 years and 35 negotiation rounds through November 2018, a final text appears imminent. Argentina’s efforts to conclude negotiations ahead of the G-20 summit in December 2018 were put on hold by Brazil’s electoral process which brought to power a very new political voice in Jair Bolsonaro.
Brazil’s new cabinet includes both orthodox neo-liberals, led by Paulo Guedes, who would welcome the trade agreement as well as economic nationalists who disfavour opening Brazil’s weak manufacturing and B2B services sector to European competition. Trade, for now, is of secondary importance as Brazil focuses on pension reform, the largest test that the Bolsonaro administration faces in 2019. The 2nd half of 2019 and into 2020 is a more realistic time frame for serious advancement with an EU-Mercosur agreement.
In the meantime, the Pacific Alliance (Chile, Colombia, Mexico and Peru) is very much open for business for European exporters. All Pacific Alliance members have signed Free Trade Agreements with the European Union and with the European Free Trade Association -EFTA, the intergovernmental organisation between Switzerland, Lichtenstein, Norway and Iceland. While removing tariffs on 92% of its imports, the Pacific Alliance has also taken baby steps towards economic integration and harmonization.
Recent years have not been kind to DACH exporters servicing Latin American markets. However, declining sales impact all exporters serving LatAm markets, not just those from Europe. Declining LatAm imports have resulted from a region-wide recession kicked off by declining commodity prices and a rising U.S. Fed, both of which served to weaken LatAm currencies and kill imports.
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In 2019, Latin America’s economy is on the mend, after bottoming out in 2016 and slipping back momentarily in the 3rd quarter of 2018. Business confidence is soaring in Brazil, rising in Colombia, Chile and Peru as new governments gain traction on improving the investment climate and investors react in kind. Policy direction in Mexico remains a concern but as the most integrated (with the US) economy in LatAm, Mexico has many positive gears keeping its economy moving forward in spite of political populism.
In Latin America, a fear of cheap Chinese imports and the rising costs of US products provides an opportunistic opening for European suppliers, particularly in sectors where government procurement plays a role. An anti-corruption bend to new administrations in Latin America may provide a more even playing field for foreign suppliers of engineering services, capital equipment, project management, and project finance, all areas where DACH economies thrive.
Leading the list of new opportunities will be Brazil, followed by Chile and Peru. All three countries boast strengthening currencies, rising foreign direct investment outlooks and pro-business administrations. DACH exporters take note.
Contact us to explore how our LatAm market intelligence can help your company take advantage of the new opportunities opening up in the region for DACH suppliers. We can help your company by providing market assessments, market sizing, risk assessment, opportunity benchmarking, investment research and other key services that will strengthen your strategic planning in Latin America and help drive your success in the region.