How to unlock Latin America's potential for nearshoring

Economic Note

  • Argentina,
  • Brazil,
  • Chile,
  • Colombia,
  • Costa Rica,
  • Panama,
  • Peru
  • General economic

3rd October 2023

Structural trade weaknesses could prevent Latin American & Caribbean from seizing the opportunities of nearshoring, but focusing on the energy transition could be key to unlocking full potential.

  • The world is currently undergoing a reorientation of global trade driven by the pandemic and geopolitical shifts, including so-called nearshoring or friendshoring. Latin America and the Caribbean (LAC) is in a seemingly good position to benefit.
  • But there are challenges. Despite a high number of trade agreements of LAC countries, the region's integration in international trade and global value chains remains comparatively low, suggesting existing trade agreements are relatively shallow.
  • Moreover, LAC continues to grapple with structural weaknesses that drag on trade and reduce its attractiveness for investments in higher value-added sectors like manufacturing and the green economy.
  • The bright spot is the energy transition, for which LAC and particularly quite closed South America possesses critical minerals. The need for those may trigger deepening of trade agreements with the EU and US and expansion of intraregional trade.

Shifting trade winds could lift Latin American & Caribbean economy

As the global trade order shifts and governments and businesses seek to strengthen the resilience and sustainability of supply chains through processes like nearshoring, Latin America and the Caribbean (LAC) may have a once-in-a-generation opportunity to strengthen its economy and reduce inequality. Given LAC’s geographical proximity to the world’s largest consumer market and its relatively strong institutional and cultural ties to both North America and Europe, it’s worth considering its integration in new global value chains.

Attracting investment to increase trade competitiveness and integration is necessary to increase LAC’s stubbornly low growth potential. While the region has weathered many economic storms over the past years, its growth prospects remain the lowest among all emerging market regions. This is largely due to major structural weaknesses like a challenging business environment, a large informal sector, education and skill shortages, and lagging digitisation. A less well-known factor relates to trade. Despite a high number of trade agreements of LAC countries, the region's integration in international trade and global value chains remains comparatively low. This suggests that not all trade agreements are equal. For trade agreements to have an impact on productivity and economic growth, it matters what and with whom you trade and what you agree in the trade agreement (its scope or depth).

In this research note, we take a closer look into the changes in global value chains and the accompanying opportunities and challenges that face Latin America and the Caribbean. We first take a close look at how LAC fits into the global picture and the composition of LAC’s trade. We assess the quality and shortcomings of both. Then taking into account the shifting geopolitical backdrop for international trade, we explore how it impacts LAC trade and close with an assessment of the most realistic opportunities for LAC to improve its trade competitiveness, both within the region and on the global stage, in the coming years.