Beyond Commodities: The India-Latin America Trade Partnership

Colonialism 2.0

Latin America suffered four hundred years of colonial domination until, by the beginning of the twentieth century, the continent was finally free. So why are Latin American nations now willingly subjecting themselves to a new kind of colonial power?

China claims it seeks to build with Latin America a “comprehensive and cooperative partnership based on equality, mutual benefit and development.”

[1] The reality is that Chinese practices harken back to the tricks European powers once used to subjugate colonies in Latin America and elsewhere.

Colonial powers knew that manufacturing industries created jobs for the masses and wealth for the capital class. That is exactly why they did not want their colonies to get into the manufacturing business. In the eighteenth century, for example, it was the British Empire’s official policy that not “so much as a single horseshoe nail” should be produced in the American colonies.[2]  Instead, the Empire kept its colonies producing the raw materials needed to run the factories back home in Britain.

Sound familiar? In recent years China has signed some $100 billion in commodity contracts with Latin America.[3] The deals include $32 billion in loans to Venezuela, to be paid back in oil shipments over a decade; a $2 billion joint venture in copper with Chile; $1.4 billion in irrigation infrastructure for Argentina, in exchange for twenty-year rights to grow corn, wheat and other crops for export to China; and so on.[4] Deals like these have kept China’s factories fueled and its people fed.

Nice deal for the Chinese. Wait, it gets better. The Chinese then turn around and sell their manufactured goods back to Latin American consumers. In fact, China exports almost as much to Latin America ($89 billion, primarily manufactured goods) as it imports from Latin America ($90 billion).[5] Much of the money China spends on Latin American commodities thus finds its way back to Chinese manufacturers.

What happens when Latin American nations try to promote their own manufacturing businesses? The Chinese do not like that so much.[6] When cheap Chinese shoes flooded the Argentine market in 2010, local Argentine manufacturers could not compete and began to have severe financial difficulties. Argentina, in an attempt to save its local shoe industry, slapped tariffs on Chinese shoes. That infuriated China, which retaliated by halting its purchase of Argentine soybeans.[7] China began buying Argentine soybeans again only when the two nations agreed on a $12 billion contract for China to work on rail projects in Argentina.[8]

Hold on, one might say, the Sino-Latin American deals are commercial contracts between sovereign nations. China buys the commodities at market rates, and Latin America gets much-needed cash; that is simply free trade at work. True enough. But it is unfortunate that Latin American nations have been so desperate for cash that they willingly entered into colonial-type agreements with a foreign power. Latin America’s short-term interests have become the enemy of its long-term interests.

It is precisely because of the need to protect long-term interests that Latin American nations should look for new trade partners. Fortunately, there is another Asian giant standing by to replace China as Latin America’s most important trade relationship: India.

India and Latin American Trade: Broad, Balanced and Building Capabilities

The India-Latin America trade relationship is still in its infancy. India and the region traded just $23 billion in goods in 2010,[9] barely one-sixth of the region’s trade with China.[10] But Latin America’s trade with India is growing fast: overall inter-regional trade grew by a factor of eight over the past decade. [11] In fact, India-Latin America trade may well be about to boom, as it shows similar growth trends today to those that Sino-Latin American trade showed a decade ago.[12]

India does not have China’s $3.2 trillion in foreign exchange reserves, nor its powerful development bank (which finances commodity deals abroad), nor its enormous state-run enterprises. But India has one thing China lacks: a vast army of private-sector companies that are gradually becoming global and globally competitive. Thanks to India’s private sector, the India-Latin America commercial relationship is different from the Sino-Latin American trade relationship in three important respects.

First, India’s trade and investment relationship with Latin America is much broader than China’s. Though India’s foreign investment in Latin America is far smaller than China’s,[13] it is also far more diverse. Raw materials (oil, iron ore and soybeans) comprise 80% of Brazilian exports to China, and 90% of Chinese investment in Brazil.[14] India’s investment in the region, by contrast, has spanned a wide range of sectors including pharmaceuticals, electrical equipment, IT services, energy and cosmetics.[15]

Latin American trade with India is being helped to broaden further by a growing web of trade agreements. Since 2009, India and Mercosur have had an Agreement on Fixed Tariff Preferences covering 452 products, an agreement that India is hoping will boost trade with Mercosur to $17 billion this year.[16] India also has a preferential trade agreement in place with Chile.[17] Such trade agreements can stimulate inter-regional trade and investment in emerging sectors such as biotechnology, micro-electronics and defense.

A second way India’s trade relationship with Latin America is different from China’s is that India’s is a much more balanced relationship.

The pitfalls of doing business with China are illustrated by the Brazil-China trade relationship. Brazil enjoys an overall favorable balance of trade with China, over $5 billion in 2010.[18] In terms of manufactured goods, however, Brazil runs a large trade deficit with China (a $23.5 billion deficit in 2010).[19] While 84% of Brazil’s total exports to China in 2010 were comprised of raw materials, an astounding 98% of China’s exports to Brazil were manufactured goods (principally televisions, LCD screens and telephones).[20] This type of imbalance has negative consequences for Brazil’s manufacturing sector, employment generation and long-term industrial competitiveness.

India, by contrast, is not simply exporting finished products to Latin America. Raw materials and intermediate products comprise over half of Indian exports to the region; these imports from India help Latin American firms become part of a globally-competitive supply chain and create employment in the region through value-added manufacturing.[21]

Chile’s experience shows the export potential of the Indian market and the employment-generation potential of Indian investment. Chilean exports to India grew ten-fold in a span of just five years (2003 through 2007). Today two Indian IT service companies together employ over 2000 Chileans.[22] As a result of growing exports to India of the sort that Chile has experienced, several Latin American countries now enjoy substantial trade surpluses with India, including Mexico, Argentina and Colombia.[23] The region as a whole enjoyed a $5 billion trade surplus with India in 2010.[24]

Third, and most importantly, India’s trade relationship with Latin America is helping to build the capabilities of local firms in ways that China’s is not.

India’s private sector can offer Latin American firms new capabilities to produce goods and services for the global economy, not just raw materials. In the long term these capabilities will be far more valuable to Latin America than China’s cash.

There are numerous examples of Indian investment-building skills across Latin America. Indian IT companies have established companies in Mexico, Argentina, Chile and Uruguay.[25]  In Brazil, Indian investment has been concentrated in knowledge-intensive sectors such as pharmaceuticals (production as well as distribution), chemicals and computer peripheral equipment.[26]

Case Study:  Latin America – A Key Pillar of Global

Growth for an Indian Consumer Products Giant

Godrej Consumer Products Limited is a $2.6 billion Indian corporate with operations worldwide.  Looking at the world from its Indian headquarters, Godrej realized that its long-term growth prospects depended on becoming equally strong in other growth regions as it was at home. It developed a 3x3 global strategy: product leadership in three key product areas (home care, personal wash and hair care) in three key regions – Asia, Africa and Latin America.

To grow in Latin America, Godrej identified the acquisition of a leading local hair-care company as a key strategic priority. The result: in 2010 this author advised Godrej on the successful acquisition of Issue Group, a leading Argentina-based maker of hair colorants and a leading brand in its chosen categories.[27] But Godrej did not stop there; the next month it acquired another hair care player in Argentina,[28] followed by a majority stake in the market leader in Chile in early 2012.[29]

These acquisitions have done far more for Latin America than simply transfer cash to the local shareholders who sold their firms to Godrej. Godrej has brought to Latin America world-class product development, manufacturing and marketing skills. Its employees in Argentina and Chile have directly benefitted from exposure to these capabilities, which they in turn will spread to other local companies inside and outside the consumer products sector.

In the twenty-first century, leading multinationals do not just come from developed markets like the United States and Europe, but from developing markets as well. Of course, there are already multiple examples of Latin American firms that have staked out strong global positions, such as Embraer, Cemex and Grupo JBS. By acquiring local companies and making them part of a globally-competitive corporation, Indian companies like Godrej are helping ensure that Latin American nations have the base of skills required to produce even more of tomorrow’s leading multinationals.

Thanks to these Indian investments, Latin American workers are building all-important skills in value-added manufacturing – skills that will enhance the region’s future export earnings. Manufacturing is far better for Latin America than simply exporting commodities. For a mining firm, a ton of iron ore will always be a ton of ore; the manufacturing firm, however, that adds engineering and design to make downstream metal products can extract far more value from that same ton of ore. Moreover, if one day Latin America’s natural resources become scarce or too expensive to extract, local economies will depend on this manufacturing know-how for exports and employment.

A Future of Shared and Sustainable Prosperity

Latin American economies boomed in recent years due to China’s demand for its commodities. As China’s economy slows – second quarter 2012 GDP growth fell to 7.6%, its slowest rate in three years – its demand for the region’s resources is also declining. Lower demand from China could help lower commodity prices by up to 30%.[30] The combination of lower demand and lower prices creates the real possibility that the recent Latin American commodity boom could produce a painful commodity bust.

Building capabilities for tomorrow is well and good, but Latin American nations have needed China’s cash to pay down their debts and to build up foreign exchange reserves.[31] So it is understandable that Latin American nations were attracted to trade with China. Now, however, is the time for a financially-stronger Latin America to embrace a new kind of Asian trade partner. Supported by common democratic values and thousands of corporate-to-corporate links, India and Latin America can work together toward a truly shared and sustainable prosperity. Latin Americans will then look back on colonial-style deals with China as a distant, but painful, chapter in their history.

William H. Avery is a business consultant specializing in trade and investment relations with India. He previously served with the U.S. Department of State as an economic officer in American embassies in Denmark, India and Sri Lanka.

All statements of fact or expression of opinion contained in this publication are the responsibility of the author.