The EU and the Pacific Alliance: Changing economic ties in an eastward-looking era

• Alexandre San Martim Portes (Brazil) and Nora Cyrus (Germany)
• 24. August 2020

The Pacific Alliance members have long-standing ties with European countries. Yet, they chose the Asia-Pacific as a target region for their intensive international trade liberalisation efforts. This begs the question: What should be the EU’s appropriate response?  A comparative analysis of the Alliance’s trade and investment flows carves out how the EU can strengthen its relationship with the bloc despite its eastward-oriented approach.

Introduction

Few developments have shaped economies in Latin America and the Caribbean (LAC) in the past decades as decidedly as China’s economic growth and its explosive demand for commodities. The end of the ‘commodity boom’ thus presented LAC with an unmistakable reminder that effective strategies for sustained economic growth and international competitiveness are urgently needed.

The Pacific Alliance (PA), a bloc composed of Chile, Colombia, Mexico and Peru,^[1] founded in 2012, hopes to address these issues; first, by increasing its members’ ‘deep’ integration, and secondly, through trade liberalisation with a focus on the broader Asia-Pacific region.^[2] While many observers expect that this regional focus will affect the PA member countries’ relations with the European Union (EU),[3] the concrete outcomes are still unclear.

We take this as a starting point and argue that the PA’s Asia-Pacific focus presents an opportunity for strongereconomic and political ties between the EU and the PA countries. Our analysis of the PA’s trade relations and Foreign Direct Investment (FDI) flows illustrates that it is mainly (potential) high-volume trade and global value chain integration that make Asia-Pacific an attractive target region. Against this backdrop, we suggest the EU should choose an alternative focus: Instead of striving for direct trade competition, its future relations with the PA should concentrate on (1) ensuring and expanding diversified trade and FDI and (2) the provision of expertise, both in trade regulation through institutional cooperation, and in technical cooperation, for instance through business partnerships in areas like renewable energy, information technology, and (agro-)industry. Thereby, the EU would offer a coherent strategy that supports the PA’s goals, enhances economic stability in LAC more broadly, and positions the EU as a long-term partner for innovation and sustainable growth.

Comparative Analysis

To extrapolate sensible next steps for the EU in light of the PA’s Asia-Pacific focus, we analyse and compare the PA’s economic ties with the EU and Asia-Pacific emerging markets. We focus on economic factors, as they are the main cornerstones of the bloc’s strategy.

Free Trade Agreements (FTAs) are central to the PA’s trade liberalization strategy. Table 1 illustrates that all PA members have signed FTAs with the EU. In contrast, the number and timing of bilateral FTAs with Asia Pacific countries vary considerably.

Table 1: Free Trade Agreements of the PA with EU and Asia-Pacific markets

Source: SICE (2018)^[4]

The PA has yet to explore the opportunities for free trade with many – especially emerging – countries in the Asia-Pacific region. Its existing FTAs with the EU, however, also still offer room for improvement. For instance, the EU’s FTA with Mexico was recently modernised and their Agreement with Chile is currently being renegotiated to achieve modern trade standards.^[5] These renegotiations resulted from the European “better regulation agenda,” which aims to strengthen the EU’s regulatory framework with the help of relevant stakeholders, such as business organisations and trade unions.^[6]

This leads us to the volume and structure of the PA’s trade with its partners. When comparing overall trade values, it is evident that the PA has traded more with Asia-Pacific countries than with the EU in 2015, mainly thanks to China. Compared to 2005, the share of the EU in the PA’s total trade value remained stable at around 10%, while China’s share grew from 5% to 13%. The relevance of different Asian economies for the PA members, and that of the EU, however varies substantially (see Figures 1 & 2). These figures illustrate that emerging Asia-Pacific is attractive for the PA. Yet, the EU continues to be an important trade partner for the bloc due to its existing commitments, long-standing historical ties, and the more diversified exports compared to Asian economies.^[7]

Figure 1. Shares of total value of PA trade in goods (export and import) by partner (2005)

Source: ITC Trade Map; UN Comtrade (own elaboration)^[8]

Figure 2. Shares of total value of PA trade in goods (export and import) by partner (2015)

Source: ITC Trade Map; UN Comtrade (own elaboration)⁶

As illustrated in Figure 3, PA members tend to export commodities to countries outside the Alliance, such as copper products (Chile, Peru), coffee (Colombia, Peru), petroleum (Colombia), wine (Chile) and flours (Peru)^[9], while they import manufactured and high-technology goods from the EU and Asia-Pacific. Mexico is a notable exception to this tendency: 82% of its exports are manufactured goods, such as automobile-related products, electronics and clothing^[10]. It therefore competes with several Asian economies and focuses on exports to the US.^[11]

Figure 3: Export composition of PA, within (left) and outside (right) of the PA

Source: Danielken, 2016 based on Comtrade data from 2014^[12]

As Figure 4 illustrates, the decline in commodity prices has led to a high negative trade balance for the PA members. Hence, while free trade clearly offers the PA Member States economic opportunities, their reliance on primary commodities as the main source of (export) income does pose a real macroeconomic threat.

Figure 4: Trade balance of Pacific Alliance members and selected foreign economies

Source:  IMF, ITC Trade Map (own elaboration)^[13]

Aside from trade, FDI is crucial for economic development. Considering the dangers associated with low productivity, lack of diversification and shrinking employment rates the PA members are facing,^[14] accelerating selected FDI inflows will be critical for them. However, two major trends in the LAC region – the decline in commodity prices since 2010, and the related decrease in FDI profitability – have left their imprint on FDI inflows into the PA.^[15]

Owing to the different economic structures, FDI development among the PA members has been incoherent: as Table 2 shows, Chile experienced the most severe drop in FDI inflows, and Peru and Mexico likewise suffered losses. Even though Colombia experienced the highest FDI profitability losses of the four countries, it received 15.9% more FDI. This was mainly related to the privatisation of a state-owned energy company.^[16] Furthermore, despite the reduced FDI volume, Chile and Mexico benefited from increasing investments into renewable energy.

Table 2: Flows of Foreign Direct Investments into PA members (2005-2016) in million USD

Source: ECLAC (2017), World Bank (2018).^[17]

In terms of sectorial composition, FDI also differed notably among the PA members. Mexico received two thirds of FDI in the manufacturing sector,^[18] while Chile’s main recipient sectors were mining (28.9%) and financial services (29.5%).^[19] Colombia received the most FDI in their electricity, gas and water sectors (53.5%).^[20] Peru’s FDI inflows are more diversified, with 22% in mining, 19% in the communications and financial sectors, and 14% in energy.^[21]

Aside from mining, (agro-)industry, and energy, the PA’s current deficits concerning trade-relevant land infrastructure and skilled human capital^[22] are areas of interest for attracting FDI. These are also sectors for which China and other Asia-Pacific countries are deemed suitable partners.^[23] Nevertheless, none of these countries are currently a significant source of FDI; the largest investors in the PA in 2016 were the USA, Spain and Canada, as well as other European and regional countries (see Table 3).

Table 3: Top 5 sources of FDI to PA countries (by country of origin, in 2016)

Sources: BRC (n.d.), BCC (2018), GDM (2017), ProInversión (2017)^[24]

An issue related to both trade and FDI is that the current global value chain (GVC) participation of the PA countries is low,^[25] meaning that they lack opportunities for diversification and technology transfer.^[26] Today’s GVCs are often located in the Asia-Pacific region,^[27] another aspect making the region attractive.

One central measure the PA has taken to increase its GVC participation is to first increase integration among its members, using this as a platform for GVC access. For instance, through the FTA between Colombia and Chile, Colombia’s agricultural exports are brought to Chile, where they are processed and then exported to the Asia-Pacific within the framework of Chile’s broad base of FTAs with the region. A similar approach has been identified for other constellations: for example for polyester fibres and carpets between Peru and Chile, and phosphates and detergents between Mexico and Peru.^[28]

To conclude, the PA members’ economic relations with the EU, both in terms of trade and FDI, are well-established and overall more diversified than those with Asia-Pacific. FDI from (and into) emerging Asia-Pacific, in contrast, is in a nascent phase. In line with trade, it offers large growth opportunities. There is hence a vast potential that the PA hopes to tap into by establishing itself as the ‘gate’ of Asia-Pacific to LAC.

How could the EU deal with the PA in an effective and mutually beneficial way in this context?

Recommendations

In the interest of long-term macroeconomic stability, we believe that any European response should primarily be underpinned by a sincere interest in supporting the PA economies to diversify and upgrade their production. This will help them to move away from primary commodities and into higher value-added goods and services, and to enhance productivity and competitiveness. In pursuing this strategy, the EU should not merely expand trade with LAC, but focus on a diversified import basket on the one hand, and an enhanced collaboration with the PA in areas in which it can provide expertise on the other hand. These are, for instance, effective trade regulation and technical cooperation.

Appropriate regulatory frameworks are not only a key issue for trade facilitation, but also one of the main objectives of the PA. European regulation has been strongly diffused to the PA through FTAs and the EU can provide capacity-building and technical assistance to help the group achieve its implementation easier. Additionally, the relevance of European standards in the PA can already be seen in their endeavours in regional regulation, such as in the recent agreement on cosmetic production.^[29] It is also relevant that standards compliance leads to a better inclusion in GVCs.^[30] Therefore, regulatory cooperation might not only enhance the EU-PA relations but also increase trade and production diversification.

Expanding technical cooperation across private and public-sector stakeholders could likewise help to boost future EU-PA relations in a mutually beneficial way. The EU should push existing initiatives such as the European Latin American Technology based Business Network (ELAN) further and actively promote joint ventures (JVs). This approach could fuel (i) the diversification and productivity of PA economies, (ii) the development of locally relevant technology, and (iii) the attraction of much-needed human capital.^[31] At the same time, it could open up opportunities and fast market access for European businesses to some of the largest economies in LAC and provide a vehicle for the EU’s positioning as a responsible partner with long-term economic interests in the PA and LAC.

To conclude, we believe the PA’s regional focus on Asia-Pacific should not be considered a threat for the EU and its future relations to PA members. As we have shown, this new focus in fact holds economic and political opportunities for strong future EU-PA ties. Yet, a coordinated effort and clear strategy that takes the PA’s approach seriously, and offers European expertise, will have to be developed swiftly if the EU wants to realise this potential.

Endnotes

^[1] Current review of potential membership of Costa Rica, Ecuador and Panama.

^[2] This analysis focuses on emerging markets in the Asia-Pacific region, including the ASEAN members (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam), as well as China, India, South Korea.

[3] EU-LAC Foundation (2017). China, Latin America and the Caribbean and the European Union: A Triangular Relationship? Conference Proceedings, 4 November 2015. https://eulacfoundation.org/en/system/files/ConferenceProceedings.pdf (10 August 2018); Nolte, D. (2018). China Is Challenging but (Still) Not Displacing Europe in Latin America. https://www.giga-hamburg.de/en/publication/china-is-challenging-but-still-not-displacing-europe-in-latin-america (10. August 2018); Malamud, R. (2015). Regional Integration and Cooperation in Latin America: Diagnosis and Proposals. Global Journal of Emerging Market Economies 7(2) 92–120 http://journals.sagepub.com/doi/abs/10.1177/0974910115574168 (24 March 2018).

^[4] SICE (Sistema de Información de Comercio Exterior) (2018). Trade Agreements. http://www.sice.oas.org/agreements_e.asp (23 July 2018).

^[5] European Commission (2016a). Executive Summary of The Impact Assessment. Brussels; European Commission (2017). Ex-ante Study of a Possible Modernisation of the EU-Chile Association Agreement. Luxemburg: European Union.

^[6] European Commission (2016b). Consultation strategy linked to Impact Assessment on a possible modernisation of the trade part of the EU-Chile Association Agreement. http://trade.ec.europa.eu/doclib/docs/2016/april/tradoc_154438.pdf. (23 July 2018); European Commission (2018). Consultation strategy linked to Impact assessment of the proposal to modernise the trade pillar of the EU-Mexico Global Agreement. http://trade.ec.europa.eu/doclib/docs/2015/july/tradoc_153665.pdf. (23 July 2018).

^[7] Inoue, K. (2017). Situación del comercio exterior de América Latina y el Caribe. https://www.cepal.org/sites/default/files/document/files/keiji_inoue.pdf (9 August 2018).

^[8] International Trade Center. (2018). Trade Map – Trade statistics for international business development. https://www.trademap.org/Index.aspx (31 May 2018); United Nations. (2018). UN Comtrade. https://comtrade.un.org/ (31 May 2018).

^[9] World Trade Organization (2018). Country Profiles: Chile, Colombia, Mexico, Peru. http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=CL,CO,MX,PE (25 July 2018).

^[10] Novak, F. & Navihas, S. (2015). Alianza del Pacífico: Situación, Perspectivas y Propuestas Para Su Consolidación. IDEI & Konrad Adenauer Stiftung: Lima. http://www.kas.de/wf/doc/kas_43567-1522-1-30.pdf?151204155843 (31 May 2018).

^[11] Gallagher, K. (2016). The China triangle. Latin America’s china boom and the fate of the Washington consensus. Oxford: Oxford University Press; Jenkins, R. & Barbosa, A. d. F. (2012). Fear for manufacturing? China and the future of industry in Brazil and Latin America. The China Quarterly, 209: 59-81.

^[12] Danielken, M. (2016). Infraestructura y desempeño de las exportaciones en la Alianza del Pacífico. Inter-American Development Bank. https://publications.iadb.org/bitstream/handle/11319/7568/Infraestructura-y-desempeno-de-las-exportaciones-en-la-Alianza-del-Pacifico.pdf (29 May 2018).

^[13] International Monetary Fund (2018). IMF Primary Commodity Prices. http://www.imf.org/external/np/res/commod/index.aspx (31 May 2018); International Trade Center. (2018). Trade Map – Trade statistics for international business development. https://www.trademap.org/Index.aspx (31 May 2018).

^[14] McKinsey (2017). Where will Latin America’s growth come from? https://www.mckinsey.com/~/media/mckinsey/featured%20insights/employment%20and%20growth/how%20to%20counter%20three%20threats%20to%20growth%20in%20latin%20america/mgi-discussion-paper-where-will-latin-americas-growth-come-from-april-2017.ashx (14 July 2018).

^[15] ECLAC (Economic Commission for Latin America and the Caribbean) (2017). Foreign Direct Investment in Latin America and the Caribbean. https://repositorio.cepal.org/bitstream/handle/11362/42024/9/S1700815_en.pdf (29 May 2018).

^[16] Lloyds Bank (2018). Foreign Direct Investment (FDI) in Colombia. https://www.lloydsbanktrade.com/en/market-potential/colombia/investment (29 May 2018).

^[17] ECLAC (Economic Commission for Latin America and the Caribbean) (2017). Foreign Direct Investment in Latin America and the Caribbean; World Bank (2018). World Bank Open Data. https://data.worldbank.org/ (24 July 2018).

^[18] GDM (Gobierno de México) (2017). México registró 26,738.6 millones de dólares de Inversión Extranjera Directa de enero a diciembre de 2016. Blog post, published 5 February 2017. https://www.gob.mx/se/articulos/mexico-registro-26-738-6-millones-de-dolares-de-inversion-extranjera-directa-de-enero-a-diciembre-de-2016?lien_externe_oui=Continue (30 May 2018).

^[19] BCC (Banco Central de Chile) (2018). Inversión extranjera directa por país, sector y región. https://si3.bcentral.cl/estadisticas/Principal1/Estudios/SE/BDP/IED.html (30

May 2018).

^[20] Procolombia (2016). Estadísticas de Inversión Extranjera Directa IED en Colombia. http://www.inviertaencolombia.com.co/publicaciones/estadisticas-ied-en-colombia.html (30 May 2018).

^[21] ProInversión (2017). Estadísticas de Inversión Extranjera. http://www.investinperu.pe/modulos/JER/PlantillaStandard.aspx?are=0&prf=0&jer=5652 (30 May 2018).

^[22] ECLAC (Economic Commission for Latin America and the Caribbean) (2018). ECLAC Highlights Importance and Opportunity in Strengthening Ties between China and Latin America and the Caribbean. https://www.cepal.org/en/pressreleases/eclac-highlights-importance-and-opportunity-strengthening-ties-between-china-and-latin (14 July 2018); OECD (2015). Latin American Economic Outlook 2015: Education, Skills and Innovation for Development. World Economic Forum (2014). Enabling Trade: Enabling Trade in

the Pacific Alliance. http://reports.weforum.org/enabling-trade-from-valuation-to-action/wp-content/blogs.dir/38/mp/files/pages/files/4-enabling-trade-in-the-pacific-alliance.pdf (10 August 2018).

^[23] Carrasquilla, G. (2018). VII Foro de la Alianza del Pacífico, una ventana para la atracción de inversión extranjera. Blog post, published 28 April 2018. https://alianzapacifico.net/vii-foro-de-la-alianza-del-pacifico-una-ventana-para-la-atraccion-de-inversion-extranjera-2/ (30 May 2018).

^[24] BRC (Banco de la República – Colombia) (n.d.). Flujos de inversión directa – balanza de pagos. http://www.banrep.gov.co/es/inversion-directa (30 May 2018); BCC (Banco Central de Chile) (2018). Inversión extranjera directa por país, sector y región. https://si3.bcentral.cl/estadisticas/Principal1/Estudios/SE/BDP/IED.html (30 May 2018); Procolombia (2016). Estadísticas de Inversión Extranjera Directa IED en Colombia. http://www.inviertaencolombia.com.co/publicaciones/estadisticas-ied-en-colombia.html (30 May 2018); ProInversión (2017). Estadísticas de Inversión Extranjera. http://www.investinperu.pe/modulos/JER/PlantillaStandard.aspx?are=0&prf=0&jer=5652 (30 May 2018).

^[25] UNCTAD (2013). Global Value Chains and Development. http://unctad.org/en/PublicationsLibrary/diae2013d1_en.pdf (30 May 2018).

^[26] Blyde, J. (2014). Synchronised factories: Latin America and the Caribbean in the era of global value chains. https://voxeu.org/article/latin-americas-missing-global-value-chains (24 July 2018).

^[27] Torres Jarrín, M. & Violante Pica, J. (2016). Emerging Markets – The Pacific Alliance Perspectives & Opportunities for Latin America. European Institute of International Studies: Salamanca, pp. 65-96.  http://www.ieeiweb.eu/wp-content/uploads/2016/01/The-Pacific-Alliance_book.pdf (29 May 2018).

^[28] CCB (Camara de Comercio Bogotá) (2012). Los encadenamientos productivos en la Alianza del Pacífico. https://www.ccb.org.co/content/ccbsearch?SearchText=encadenamiento&buttonSearchHeader=Daten+absen den (29 May 2018). Page 03.

^[29] Pacific Alliance (2018). Eliminación De Obstáculos Técnicos Al Comercio De Productos Cosméticos. https://alianzapacifico.net/cloudcomputing/iadb-org/serverhosted/alianzapacifico/multimedia/archivos/Anexo-1-Cosmeticos-26-06-15-limpio-webex.pdf (31 May 2018).

^[30] Kaplinsky & Morris (2017). Do Regulations and Standards Support Sustainability Dynamics in Global Value Chains? Bridges Africa, 6 (7). https://www.ictsd.org/bridges-news/bridges-africa/news/do-regulations-and-standards-support-sustainability-dynamics-in. (23 July 2018).

^[31] Ramos, G. (2016) Trade, Investment and SMEs as Engines for Growth in the Pacific Alliance. In Torres Jarrín, M. & Violante Pica, J. (eds.) (2016) Emerging Markets – The Pacific Alliance Perspectives & Opportunities for Latin America. European Institute of International Studies: Salamanca, pp. 65-96.  http://www.ieeiweb.eu/wp-content/uploads/2016/01/The-Pacific-Alliance_book.pdf (29 May 2018).