Even as other markets remain roiled by uncertainty, the hemispheric trade between the U.S. and South America looks bright for 2012 and even brighter in the years ahead.
U.S. containerized imports from the region are projected to increase 5.2 percent in 2012 after increasing 8.7 percent in 2011, according to PIERS, a sister company of The Journal of Commerce. U.S. exports to the region are projected to be even stronger this year, growing 8.9 percent after increasing 2.3 percent in 2011.
Strong global demand for South America’s commodity-driven exports is expected to continue in 2012, but the really positive story for the long-term is the region’s growing middle class.
According to the United Nation’s Economic Commission for Latin America, more than half of Latin America’s population is now considered to be middle class, based on the definition that the annual income of middle class is between 45 and 75 percent of the regional per-capita income of $11,900.
South America for years has been an important exporter to the U.S. of coffee, bananas, stone fruits and forest products. South America now is emerging as a popular location for the near-sourcing of apparel, automobile parts and other manufactured products.
Colombia, Brazil, Chile and other nations are seeking greater foreign investment in manufacturing and for developing ports and transportation infrastructure. That is contributing to the rapid growth of the middle class, so U.S. exports are expected to grow even faster than imports from the region.
This growth outlook assumes Latin America will continue to improve its ports and inland infrastructure. Trade growth has exceeded infrastructure development in most countries of South America. Port congestion, inadequate highway access and the lack of robust freight rail networks are placing a cap on the region’s trade with the U.S. and Asia.
However, South America’s grain, coal, minerals and wood products are in such strong demand globally that other nations such as China are investing in infrastructure development there to keep the trade flowing. Generally, South American countries welcome this investment as a way to expedite much-needed infrastructure projects.
Chile is a bright star on the continent. Its infrastructure development has kept pace with its booming export sector, and Chile is an important source of winter fruits, wine, minerals and forest products for the U.S. market. Chile’s efficient transportation infrastructure helped the country to bounce back quickly from the devastating earthquake in 2010.
Chile also provides an example of how a free trade agreement can promote economic growth. Chile signed a free trade pact with the U.S. in 1992, and two-way trade has prospered. Economists are equally enthusiastic about the free trade agreements that the U.S. signed last year with Colombia and Panama. As tariffs are reduced, two-way trade is expected to increase rapidly.
Brazil remains the economic powerhouse of South America. Sao Paulo, with its large manufacturing base, accounts for 54 percent of the gross domestic product of the entire continent, according to Walter Kemmsies, chief economist at port design and engineering consultant Moffatt & Nichol.
Liner services linking the U.S. with South America are well established and plentiful. In fact, carriers attempt to prevent overcapacity by operating in vessel-sharing arrangements. The VSAs provide extensive port coverage while helping carriers to manage their costs and prevent overcapacity from driving rates down to non-compensatory levels.
U.S. trade with Latin America increased 82 percent over the past decade, making it the fastest-growing trade lane for the U.S., according to the Congressional Research Service. While economists are mostly bullish on trade growth, they emphasize that today’s high commodity prices will not continue for the long term. Therefore, if South American economies are going to continue to grow, they must follow the China model and invest more in the manufacturing sector.