As global supply chain reorganization, interest rate adjustments, and climate change response pressures intersect, the economy of Latin America is facing a new turning point. Major countries like Brazil, Mexico, and Chile are gaining renewed attention in the global economic flow based on their abundant resources and strategic locations; however, chronic structural problems and political instability continue to hinder progress. Amidst the coexistence of pressures from inflation, securing fiscal soundness, and diversifying industries, attention is focused on whether Latin American countries can shift from a resource export-centered economic model to a future growth strategy based on environmentally friendly and new industrial technologies. However, with the recent imposition of high tariffs by the United States, Latin American countries find themselves at a crossroads of challenge and opportunity.
At the Central America and Caribbean Community (CELAC) summit held in Tegucigalpa, Honduras, on April 9 (local time), the leaders of 11 countries called for "joint responses" against U.S. President Donald Trump's high tariffs. On the same day (April 9), President Trump announced that he would suspend reciprocal tariffs for 90 days on countries other than China. The Associated Press noted that "despite this, many U.S. trading partners and allies are beginning to seek reliable trade policy options in anticipation of the uncertainties of the Trump administration."
The relationship between Latin American countries, which have geographically close ties and actively trade with the United States, appears to be tense. President Trump's anti-immigration policies and notifications of additional tariffs have resulted in a decline in trust with nearby Latin American countries. To diagnose the structural limitations of Latin American economies and future growth strategies, 'Commerce' recently conducted a written interview with José Antonio Ocampo, a globally recognized development economist and former United Nations Deputy Secretary-General, as well as former Minister of Finance of Colombia. Professor Ocampo has been at the forefront of Latin American economic policy for decades, providing in-depth insights into policy directions aimed at breaking away from resource dependence, expanding technological investments, and establishing inclusive growth foundations. He discussed the future economic trajectory of the Latin American region, focusing on Argentina's radical economic reforms, Chile's resource nationalization movements, and the political and economic uncertainties in Brazil and Mexico. The following is a Q&A with Professor Ocampo.
--How do you view the potential impact of U.S. tariffs on the Latin American economy?
"For most Latin American countries, a 10% tariff is anticipated, so I believe the impact will be at a typical level. However, the automotive industry in Mexico, which is expected to be primarily affected, will face a 25% tariff."
Beginning March 4, the United States imposed a 25% tariff on products from Canada and Mexico (with a 30-day exemption for automobiles), but two days later, it agreed to exempt products that meet the origin regulations under the United States-Mexico-Canada Agreement (USMCA).
However, with the 25% tariff on imported automobiles taking effect on April 3, the impact on Mexico's automotive industry is expected to grow. According to a report from the Center for Strategic and International Studies (CSIS), the automotive supply chains of the three North American countries (the United States, Canada, and Mexico) are closely interconnected, indicating that parts such as engines and transmissions cross borders an average of 7 to 8 times before final assembly into completed vehicles.
--Is there any opportunity for Latin American countries in the U.S. tariffs?
"In other words, it also signifies an opportunity to build stronger connections with European and Asian countries. In particular, the opportunity has opened up for Latin American countries, including Mexico, to replace U.S. agricultural exports to China, which has become increasingly difficult for the U.S."
Last year, trade volume between China and the 20 major Latin American countries totaled $480 billion (approximately 685 trillion won), a figure that has increased 34 times compared to $14 billion (approximately 20 trillion won) in 2000. Major export items to China include soybeans, copper, iron ore, oil, and beef, which account for over 70% of total exports. Brazil is the leading country in exports to China among the 20 Latin American countries, with exports reaching $122 billion (approximately 174 trillion won) last year, resulting in a trade surplus of $63 billion (approximately 89 trillion won). Following Brazil, Chile recorded exports of $43 billion (approximately 61 trillion won), while Peru ($25.5 billion) and Mexico ($18.7 billion) followed.
--How do you see future cooperation between Korea and Latin America developing?
"I believe that 'technical cooperation' is the most crucial area of cooperation between Korea and Latin America. I think Korea's strong capabilities in technological research and production can assist the technological advancement in various sectors (railways, water resources, bio, etc.) of Latin American countries. I believe Korea's investments can contribute not only to the regional development of Latin American countries but also provide an opportunity to rapidly expand into the Latin American market."
--Can Latin American countries continue to export resources steadily in the future?
"Most Latin American countries like Chile, Peru, and Mexico have significant copper reserves, and some countries like Bolivia, Chile, and Argentina possess high-quality lithium resources. Therefore, they are expected to be active in both the copper and lithium markets. However, in terms of transitioning from being resource-exporting countries to leading in technology, there are no clear signs except for a few like Brazil."
--Are Latin American countries making progress in pursuing new growth models such as environmentally friendly initiatives?
"Latin American countries appear to be undertaking good projects to respond to climate change. However, it is challenging to consider these movements as progressing toward a new growth model. Some point out that there is a lack of policies needed to develop into a new growth model, and investments in research and development (R&D) in environmentally friendly sectors are extremely low."
--Some Latin American countries are experiencing significant inflationary pressures; what are the causes and forecasts regarding interest rates?
"Extreme cases like Argentina and Venezuela mainly stem from expanding the currency to cover fiscal deficits. In other countries, inflation peaked in 2022 due to the Ukraine-Russia war, but has decreased thanks to interest rate hike policies. Interest rates in Latin American countries are expected to decline somewhat over the next few years."
--What are the major fiscal issues facing Latin American countries?
"Except for some major economies (especially Brazil and Colombia), fiscal deficits are generally at a moderate level. Brazil has the highest debt level, while Mexico and Colombia also have somewhat high levels. Argentina has drawn attention for its significant fiscal deficits and debts, but has reduced its fiscal deficit under the austerity measures of the Javier Milei administration. The tax reform in Colombia in 2022 can be seen as a good example of progressive reform."
--Labor market rigidity, educational inequality, and institutional corruption are cited as challenges faced by Latin American countries.
"In terms of employment, there was significant progress during the rapid growth from 2003 to 2013, but this was not the case at other times. However, education has made great strides in the past 30 years, and inequality has somewhat decreased. Nonetheless, corruption remains widespread."
--What is the impact of exchange rate volatility on the Latin American economy?
"Excluding some Latin American countries like Argentina, exchange rate volatility is relatively low at present. The main factors are fluctuations in trade conditions and the availability of external financing. This affects prices and trade, but its impact on investment is expected to be relatively weak."
--What impact will the rise of populist leaders across Latin America have on the economy?
"The question is how they affect institutional structures. The impact of populist leaders on economic stability varies by case. However, it cannot be said their influence is uniformly significant. In the case of the Milei administration in Argentina, improvements are observed in terms of economic stability, but it is difficult to agree with the direction of his economic policies."
Currently, there are many populist leaders in Latin American countries implementing extreme policies across the political spectrum, including Argentina's Milei president. Among them, representatives include Luiz Inácio Lula da Silva, president of Brazil, Gustavo Petro, president of Colombia, and Nayib Bukele, president of El Salvador.
--Is the radical free-market reform of the Milei administration in Argentina sustainable?
"In the short term, these policies have been effective for macroeconomic stability. Conversely, there have been no significant announcements regarding production sector policies, so I am skeptical about the long-term effects of the Milei administration’s policies."
Since taking office in December 2023, President Milei of Argentina has pushed for 'state austerity' and 'market openness' through extreme right-wing free-market ideology. He is praised for significantly lowering the inflation rate from over 200% during his term by opening the trade market and eliminating tariffs on some imported products. However, as he pursues radical policies such as reducing the number of public employees and cutting pensions, internal conflicts are intensifying, with backlash from vulnerable social groups and the working class.
--What are your thoughts on the Boric government's nationalization of the lithium industry in Chile?
"I believe the Boric administration is adopting good policies to manage lithium resources, providing important revenue for the country while still offering opportunities to private investors." President Gabriel Boric announced the nationalization of the lithium industry in April 2023. Accordingly, lithium contracts are made under public-private partnership forms controlled by the Chilean government. According to the United States Geological Survey (USGS), Chile is the world's top lithium reserve country and the second-largest lithium producer.
--What are the causes of the decline in the value of the Brazilian currency, the real, and what is the outlook for the mid-term economy?
"Basically, the decline in the real appears to be due to Brazil's high fiscal deficits and public sector liabilities. At the same time, the central bank is raising interest rates. The effects are unclear, but macroeconomic stability has not been clearly achieved. Growing polarization is becoming a politically complex issue. I foresee that economic policies will be influenced by whether a left or right government is in power. I believe there is a higher possibility of a leftist government continuing in the future."
--How do you evaluate the imposition of tariffs on Mexican automobiles by the United States?
"So far, President Claudia Sheinbaum of Mexico has been successful in negotiations with President Trump, apart from issues related to the automotive industry. Particularly, cooperation regarding the control of drug cartels like fentanyl and the reduction of illegal immigration has been successful. Aside from the automotive sector, the situation still appears to be acceptable."
President Sheinbaum of Mexico has been described as pursuing a 'pragmatic approach,' citing the deployment of border forces and securing a tariff suspension in diplomatic engagements with President Trump. On April 17, President Trump mentioned that he had a "very productive call" with President Sheinbaum regarding tariff negotiations with Mexico.
Terminology Explanation
1) United States-Mexico-Canada Agreement (USMCA)
A free trade agreement among the three North American countries that came into effect in 2020, replacing and amending the North American Free Trade Agreement (NAFTA), which took effect in 1989. It features strengthened regulations regarding digital trade, labor, and the environment. Notably, it includes provisions reflecting the 21st-century trading environment, such as an increase in the percentage of North American parts in the automotive industry, strengthened labor standards in Mexico, and guarantees for the free flow of data.
2) Colombia's Tax Reform
A progressive tax reform implemented under President Gustavo Petro, which included tax increases on high-income earners and large corporations. In the case of corporate tax, it abolished tax benefits that gradually reduced corporate taxes, applying a flat rate of 35% to all but a few businesses.
3) Populism
A political ideology or strategy that criticizes political elites or existing political systems, presenting a dichotomy of 'pure people versus corrupt elites.' It is characterized by appealing to popular sentiment and demands to gain support, manifesting across both the left and right.
※ This article was published in the May issue of the monthly magazine 'Commerce.' Please search for 'Monthly Commerce' on Naver.