Latin America's changing export sector (and shift away from the US)

There is an ongoing transition in Latin America’s markets – international trade is going multipolar, with China taking over major stakes and pushing out the United States. That is according to a study from the McKinsey & Company, which suggests that a new era is dawning for the region’s trade future.

Though Latin America did not advance as much as it could have, and stayed a step behind other regions in the rapid growth of the last century, the economic and developmental state of the region could see a massive boost in the coming era.

McKinsey & Company identifies the period from 1989 to around 2019 as the ‘Era of Markets’, which was marked by a huge increase in global economic cooperation and the proliferation of new technologies. Latin America also saw trade increase during this period, but it largely fell behind in other areas.

China overtaking the US as main trading partner

Latin America is now ushering in a new multipolar era, where trade is no longer dominated mainly by the US. From the year 2000 to 2021, trade between Latin American countries and China grew 28-fold, which is nearly twice the rate of growth of trade with emerging-market and middle-income peers.

“In South America, China became the largest extra-regional trade partner for almost all of the largest economies. In Central America, the United States remained the largest trade partner, but China rose to become the second largest” said Andres Cadena, senior partner at McKinsey & Company’s office in Bogota.

One exception to the remarkable growth in trade with China among Latin American countries is Mexico. This regional powerhouse, sharing a border with their North American neighbor, saw the largest increase in goods trade with the US of any country globally, except China. That is partly thanks to trade agreements between Mexico, the US, and Canada.

Raw resources and the coming net-zero transition

Exporting resources will remain a major focus for Latin America moving forward. In fact, the region is home to a disproportionately large share of the world’s resources, many of which (like lithium, copper, and rare earth metals) are essential for innovative technologies and the coming net-zero transition.

Latin American countries hold nearly half of the entire world’s reserves of lithium, which is in huge demand for the production of batteries that store green energy and run electric vehicles, for example. The world however faces a major shortage of lithium – unless supplies are increased very soon.

The paradox of this potential for the Latin American market in raw minerals is that, while these resources are needed for renewable energy and mobility, the mining process is massively destructive to the environment. And that is not the only damage to the environment here: Latin America is also seeing some of the world’s worst deforestation, particularly in the Amazon rainforest.

Digital adoption and intellectual property

Latin America has long lagged behind in innovation, being a chronic latecomer to new technologies. This region has stayed behind not just in practical areas like mechanized farming, where the region is significantly behind Southeast Asia, but also in digital technologies.

Africa, for example, has seen an explosion in mobile technologies being used for everyday things like send and receiving payments. India too has seen a major increase in connectivity, with huge rural areas now connected to the internet for the first time.

And though Latin America lags in these areas, there has been significant movement in the right direction that might indicate the region is set to catch up. One example from Brazil is Pix, a new digital payments system that saw massive uptake in a very short period of time. Besides that, four-fifths of Latin American start-up unicorns focus on fintech or e-commerce, indicating a rapid rise in digital adoption.

The region imports around eight times more intellectual property than it exports, which is the highest such ratio outside of Africa. In order to stay ahead of the technological curve, Latin American countries will need to continue integrating the existing technologies that it still lacks while also looking ahead and being proactive with adoption of new innovations like AI.

“Latin America has remarkable intrinsic strengths: a population of more than 600 million with a high share of young adults, enormous reserves of minerals and abundant energy resources, and extensive biodiversity,” said Cadena.

“The transition to a new era is a fork in the road for Latin America. If the transition is handled well, the region’s abundance of critical resources for the net-zero transition could spur investment in infrastructure and human capital, and could catalyze both technology transfer and innovation. Conversely, if the transition is handled poorly, the region could find itself with rising inequality, increasing social tensions, and economic stagnation.”