4 KEY VARIABLES TO UNDERSTAND THE EFFECTS OF COVID-19 ON LATIN AMERICAN TRADE
To understand the effects of the COVID-19 pandemic on trade in Latin America, we have to gauge the size and depth of the economic recession. This will be the central factor in making scenarios about the dynamics of future imports and exports in this region of the world.
The Economic Commission for Latin America and the Caribbean (ECLAC) projects that the overall economic downturn in the region will be 5.3% of Gross Domestic Product (GDP). This is only comparable to other historical episodes such as the so-called “Great Depression of 1930” when the economic decline marked 5%, or in year 1914, at the beginning of World War I, when the regional collapse marked 4.9%.
Of course, it is not the same to talk about the commercial possibilities in Brazil or Mexico, as in other locations such as Peru or Costa Rica. The internal particularities of each country now have a greater weight when elaborating scenarios and at Credit Report, we want to present the 4 key variables to understand how the COVID-19 will impact Latin American trade in these coming months.
Economic recovery in the United States and China
Despite the fact that Latin American companies have opened up to new points of trade in the last two decades, the main trading partners are still the United States and China, and the pace of the economic recovery of these two countries will be more than decisive in the region.
If the internal economic rebound in China begins in the third quarter of this 2020, that will be good news for Latin America. China’s economic reactivation, without a doubt, can be a fundamental help for the demand for more raw materials and products from Central and South America.
The same will happen if the United States manages to contain COVID-19 infections in most of its large cities and can return to the economic path of growth before winter arrives.
Raw material prices
A good part of all exports from Latin America belong to the raw materials sector and any increase in the prices of these products can help the commercial flow in the region.
We must talk about oil, of course, but also about other raw materials such as iron, copper or uranium that are in demand in the Latin American region, mainly from China and also from some of the European Union countries.
A boost for regional agreements
COVID-19 opens a new debate on whether international trade should be stimulated by comprehensive and global multilateral agreements or whether regional agreements similar to those of the European Union should be given strength.
Export restrictions on medical products show that the trend may be towards increasingly regional and fragmented trade.
Therefore, efforts by Latin American companies to create strong and transparent alliances with their trading partners in neighbouring countries can be another driver of economic activity.
Increased tax expenses by Latin American countries
The weight of public debt in different Latin American countries is very different. The same is true of their capacity to increase government spending and to help boost their countries’ domestic trade as well.
On the one hand, there are economies such as Peru or Paraguay with tax deficits that are below 25% of GDP. On the other hand, Argentina (89.4%), Brazil (75.8%) and Costa Rica (61.3%) have public debts that will prevent them from playing a greater role in trade with imports of a large number of products and machinery, which will be needed in the midst of the economic recovery phase.
The scenario is complex. The World Trade Organization estimated that the drop in trade in Latin America will be 22% by the end of this year. However, any change in any of these 4 key variables can help reduce the negative effects of the pandemic.
At Credit Report we understand that today, more than ever, it is crucial to find new clients for your products and company, we can help you with valuable information that will allow you to evaluate those potential business partners.