Will the left turn in Latin America affect trade?

By Mauricio Paz, vice president of global trade finance at BBVA in New York

At this stage there is no doubt in anyone’s mind that the lurch towards the left in Latin America is unstoppable, at least for now. Today, four out of the six largest economies in the region have left-leaning governments representing about half of the total GDP in 2005, and half of the population. In 2006, three big countries in the region face presidential elections, with left-wing candidates running well ahead of their opponents in two of them. A fair question to ask at this point might be: will this turn to the left have an impact on trade?

Trade performance is in good part linked to growth. The more a country trades, the more it grows. There are several other components to trade performance such as the size of the economy, geographic location, currency exchange rates, international commodity prices, and even weather-related issues. In addition, one relevant component of trade performance is politics, domestic politics. The absence of trade-distorting policies such as taxes, subsidies, regulations or laws makes it easier to exchange goods and services. Internal agendas can easily modify these policies, posing a risk to the flow of goods and services.

Cuba aside, it all started with Hugo Chavez in Venezuela’s presidential election in 1999. He won the top job promising his compatriots an end to poverty and corruption with a socialist agenda. In 2002, Brazil elected its first left-wing president in almost 40 years, Lula da Silva. His Worker’s Party had all the leftist tendencies known: Marxists, Trotskyites, socialists, radical syndicalism, etc. His best plank: “Brazil doesn’t have to pay its foreign debt.” Argentina followed suit after the biggest crisis in the country in recent history. Nestor Kirchner was sworn in during 2003 with the “returning to the republic of equals” slogan and in no time visited his new best friend Lula da Silva with whom he is “proud of his radical left-wing political past”.

Evo Morales, the leader of the left-wing cocalero movement was elected president of battered Bolivia on 18 December 2005. Under his platform, he was heard in the public arena declaring, “Capitalism is the worst enemy of humanity”, and referring to the Free Trade Area of the Americas (FTAA) agreement as the new form of colonialism in the Western Hemisphere. Michelle Bachelet continued the socialist saga in Chile when she was sworn in as the fourth centre-left president since military rule ended in 1990.

But, are these political changes to the left shifting the way trade is conducted in the region? Does the animosity against free trade and liberalisation ever materialise? Or, is this juncture an opportunity to revitalise more trade among Latin countries?

To answer these questions one should review the export/import data from those countries with socialist leaders over the past few years. The case of Venezuela is an exceptional one due, in part, to high crude prices. However, in 2003 and 2004 when the average price of crude was $28 and $37 respectively, the export goods from Venezuela to the US, its main trade partner, were on average 10% higher that the preceding year. In 2004 and 2005, the jump was more significant, reaching increments up to 45% and 36% each year. Trade in general has been on the up in the last four years in Venezuela, despite the intricate CADIVI processes for exchange control.

Even with the continuing rhetoric from Chavez against capitalism and neo-liberalism, the country is still so dependent on its oil that it is hard to believe that its left-wing leaders will cut the tap of never-seen-before revenues to help advance with its socialist reforms.

The case of Brazil leaves more than one in disbelief. President Lula was not showing the signs of the radical leftist he was roaring about during the election period. He moved to the centre left and his foreign trade agenda has proven effective. During the Lula administration, Brazilian foreign trade has increased dramatically, changing from a budget deficit to several surpluses in the last three years. In 2004, it achieved a $29bn surplus due to substantial changes in its commercial focus. Since then, Brazil has been looking for new exchanges with other large underdeveloped countries and regions, such as China, and countries in the Middle East and Africa.

Despite the Brazilian real’s appreciation against the US dollar, a $38.6bn surplus was calculated at the end of 2005. Lula is running for re-election in October of this year and, although he has lost some support due to corruption scandals in 2005, it is likely to see him once again leading the largest economy in the region with a good trade sense.

The case in Argentina is peculiar. Nestor Kirchner has also been an advocate of regional intra-LatAm trade and Mercosur has become the centre point for trade policy over any other trade agreement, such as, FTAA. In 2005, trade surplus decreased to $11.3bn from $12.1bn in 2004 as imports rose to $28.6bn from $22.5bn in the previous year. Exports last year grew to a record of $40bn from $34.5bn in 2004. Argentina still has to prove the rebound in exports with another good year in 2006. There is no sign that the political agenda will reverse this trend in an environment of good international commodity prices.

Until now the countries with left-leaning leaders in Latin America are doing just fine in trade-related matters. The newcomers will not hurt trade either.

Chile is different. Chile has had a long-standing history of success in international trade, partly helped by the price of metal commodities over the last few years. Chile has been under socialist administration since the Coalition of Parties for Democracy took power in 1990. The newly elected president, Michelle Bachelet, is a socialist herself but at the same time a free-market supporter who won’t put Chile in a different position regarding trade. Chile has one of the most dynamic open economies in Latin America, which includes trade agreements with the US and China and support for the FTAA.

Bolivia is the 15^th largest economy in Latin America. Its trade has been in surplus in the last three years. Evo Morales rose to power as an organiser of coca growers. The election of Morales may complicate the relations between Bolivia and the US, by far its main trade partner. But Morales is already assuring regional trust evidenced by the recently signed agreement with Brazil to provide natural gas. Nationalising the natural reserves, especially hydrocarbons, might prove socially attractive for the country but the gas must be traded to make it economically beneficial. Hence, foreign trade will not be affected by this new administration, rather it would be a good opportunity for the landlocked country to expand its trade ties as Morales suggested right after his first presidential trip. Venezuela wants chicken meat; Japan, sugar; China, soybeans; Cuba, powdered milk; and some African nations are also interested in sugar.

This year, three countries have presidential elections: Peru in April; Colombia in May; and Mexico in July. Both in Peru and Mexico there is a good possibility that Ollanta Humala and Andres Lopez Obrador will become presidents respectively. These are two left-leaning politicians who, if elected, will increase the economic power of Latin America led by socialist presidents to 87% (as per current 2005 GDP). I personally feel that these governments pose a threat to such trade issues as the FTAA, but by no means to the stability and growth of trade volume regionally and worldwide.

Therefore, the answer to whether the left turn in Latin America will have a negative impact on trade in the region is no. There is a sustained pattern of growth in trade between Latin America and the rest of the world that would continue in spite of domestic political agendas.

Statistical sources:

• IMF World Economic Outlook. Population. September 2005.
• FOCUS. Banco Central do Brasil. Brazilian Trade Balance Performance in 2005. January, 2006
• Instituto Nacional de Estadistica de Venezuela. Resumen de Comercio Exterior, 2005.
• Instituto Nacional de Estadistica y Censos. Argentina. Comercio Exterior.Balanza Comercial. December, 2005.
• Instituto Nacional de Estadistica de Bolivia .Resumen Estadistico. December, 2005.
• Banco Central de Chile. Series Estadisticas. Comercio Exterior. Balanza Comercial, 2004.