Although US President Donald Trump has been working hard to secure an improved deal with China, many have suggested that the end was nigh for the two countries and that investors should consider pulling out of the markets before catastrophe hit. Granted, very few analysts or investors believed such doomsaying, but many had genuine concerns over the long-term implications of tariffs, with the US imposing three rounds worth more than US$250 billion. The countries halted tariffs at the start of the year, but with little movement in January, the prospect of a new China/US trade agreement seemed to be unlikely for a while.
For years, the Chinese government has been subsidizing major industries which give them an unfair advantage on the world stage, and in retaliation, Trump added tariffs on goods last year. China quickly fought back, restricting imports on goods such as soybeans and metals, and despite efforts to rein it in, the US trade deficit hit a 10-year high in 2018. Now, though, things appear to be looking up, with Trump suggesting that he believes an agreement will be reached ‘fairly soon’. How soon that trade agreement will be, however, remains to be seen.
One market that has dealt well out of the US-China trade war is Latin America, with investors turning their attention towards new markets in an effort to reduce their risk and reliance on the US or China. The political upset has been a long time coming, and like we’re seeing in the United Kingdom, the US-China saga demonstrates the need for investors to be vigilant and prepared for political and economic changes at the drop of a hat. Diversifying is one of the best ways to do that, and Latin America offers many attractive attributes investors need.
Fallout is Good for Latin America
Latin America may not be a new player amongst Asian or North American businesses, VCs, and investors, but the recent upset has put it back on the world stage and highlighted that its emerging and established markets are booming as we head into new and exciting times.
Latin America is China’s second largest area of foreign investment, with more than US$25 billion being pumped into its economies in 2017 alone. On top of that, China’s Belt and Road Initiative, a government strategy to increase infrastructure development and investments in 152 countries, has 14 Latin American countries involved, showing that Chinese investors are keen to expand in the market, particularly in the technology field, where China is looking to dominate as countries prepare to roll out 5G technology and infrastructure through Huawei.
The United States, on the other hand, has a strong relationship with many Latin American nations because of its proximity and has a range of free trade agreements and deals in place, such as the North American Free Trade Agreement, supporting 2.2 million jobs and generating US$630 billion in trade by 2020. US businesses have been keen to expand into Latin America due to cheap labor, a skilled workforce and growing middle-class. Some are expanding into LATAM through acquisition to bypass years of brand development and relationship building, whilst others take a slow and steady approach by incorporating.
At present, the US-China trade war is good news for Latin America, but even when the US and China relationship chances and becomes more hospitable, businesses cannot overlook the potential of expanding into Latin America if they want to stabilize their revenue streams.
Benefits of Latin America for US and Chinese Businesses
For Latin American firms looking to increase trade and FDI with the US and China, the key is to focus on networking, brand building, and making their business a force to be reckoned with in the market. As we have seen with firms such as 99, Brazil’s home-grown ride-hailing app, developing a product for local consumers rather than trying to replicate the success of a Western brand (Uber, for example) affords it more credibility and allows it to penetrate the market more effectively. 99 was sold to China’s Didi Chuxing in a deal worth US$1 billion last year, one of the largest in Latin American history, spawning a whole host of new offshoots and startups looking to generate similar levels of investment. With North American firms outsourcing their tech to Latin America, and LATAM governments pushing for the region to become a major technology hub, investors in the US and in China are naturally interested.
For US firms experienced in investing in China, one should look to Latin American rivals in the same niche. As reported in Money Observer, iShares Latin America 40 ETF produced a three-month return of 16.8 percent to 8 March last year, compared with 5.9 percent produced at iShares MSCI All Country Asia ex Japan ETF. Investing in Latin American businesses was not considered to be the best option for hedge funds, investors and venture capitalists a few years ago, but now they can generate similar – if not better – returns in LATAM.
Businesses in the United States also benefit from geography, with Latin American and Caribbean countries boasting a collective GDP of US$10,586,642 and economies such as Brazil (US$2.05 trillion GDP) and Mexico (US$1.15 trillion GDP) in easy reach through the advancement in infrastructure and logistics. China, on the other hand, benefits from a growing number of free trade agreements with Latin America, including the China-ASEAN Free Trade Area, China-Peru Free Trade Agreement, Costa Rica Free Trade Agreement, and most recently the upgraded China-Chile Free Trade Agreement, affording businesses both in Latin America and China more opportunities to trade and open up new sectors.
Whilst an improved US-China trade agreement now seems more likely, that is not to say that businesses should avoid Latin America or withdraw ambitions to expand into the territory. Indeed, even if the United States and China patch up their wounds and recover from their trade blow out, it’s hard to deny the unique opportunities available in many LATAM markets, particularly in these globalized times where investors should target emerging markets.