The Challenges Facing Latin America and U.S. Policy in the Region

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The idea that Latin AmerIca is an isolated global economic backwater at risk of predatory trading partners has been misplaced for some time. Brazil and Mexico are among the world’s 15 largest economies; Argentina is among the 30 largest.

In the past 15 to 20 years, moreover, large parts of Latin America have forged trade agreements with the European Union, or with Japan and Korea through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)—the successor to the Trans-Pacific Partnership that the United States rejected. There are bilateral and sub-regional agreements among countries (the Pacific Alliance, a more informal arrangement agreed to by Costa Rica, Panama, and the Dominican Republic to take advantage of nearshoring opportunities, and Mercosur among the Southern Cone countries). Taken as a totality, the region is substantially more connected to the broader world than ever before.

And then there is China. Twenty-one Latin American countries have signed on to China’s Belt and Road Initiative, and countries like Chile, Costa Rica, Ecuador, and Peru have formalized free trade agreements with China. U.S. firms may not be rushing to nearshore in Mexico, but Chinese firms supplying the U.S. market are. Chinese investments in regional infrastructure projects fill a gap that U.S. companies presently do not.

Moreover, except for the cautionary tale of Ecuador’s billions in borrowing from China, debt entrapment is not a real concern for the region’s democracies: new sovereign debt by China to the region has all but disappeared since 2015. More generally, China has become South America’s major trading partner, reflecting global trends; over 120 countries have China as their leading commercial market. Most Latin American countries see the relationship as transactional rather than a strategic pivot.

The region’s economic ties with China are likely to strengthen in coming years in response to the economic rationales followed by the rest of the world. The August 22–24 summit of the BRICS economic grouping made up of Brazil, South Africa, India, China, and Russia, agreed to invite additional countries to join, including Argentina. The expansion was widely interpreted as a victory for China’s efforts to expand its global influence.

It is nonetheless striking the extent to which neither left- nor right-of-center governments have generated the growth policies and economic reforms necessary to raise living standards more quickly and reduce inequalities. In 2012, East Asia had roughly equal per capita incomes to Latin America, as measured by purchasing power parity. Today, East Asia is 40 percent ahead. Wealth concentration at the top of the pyramid is one concern, but so is the fact that the bottom 50 percent of people in Latin America are poorer than their counterparts elsewhere.

Regional governments could do worse than look at the emerging opportunities globally for solutions to their middle-income trap, as these are multiplying.

First is the promise offered by adapting to the world’s diversifying supply chains. Everywhere, from South and East Asia to Europe and the Middle East, there is a renewed sense of urgency about building resiliency and capacity. Some countries in Latin America are well placed to develop policies to attract foreign investment and production facilities to supply North American, regional, and global markets. Mexico could emerge as a significant producer of semiconductors with a clearer investment strategy.

Second, South America is an important source of the inputs needed for the new energy economy. It contains 40 percent of the world’s copper reserves, 35 to 40 percent of lithium reserves, and significant deposits of nickel, cobalt, and other critical minerals. Chile is already the world’s second-largest producer of lithium, and there is international investor interest to develop critical mineral resources more broadly.

Additionally, Latin America has an exceptionally low carbon footprint, with the world’s highest reliance on renewables for energy generation. There are significant investments and government commitments to deepen that capacity, aiming to include—as in Chile—the production of green hydrogen for export. Countries like Brazil, Argentina, Mexico, and Colombia have or can also develop greater natural gas exports as the world economy transitions to cleaner energy. There are forecasts of a new energy boom in Latin America. As much of the world looks to lessen dependency on Russian oil, hydrocarbon production in the region will remain of strong interest for the foreseeable future.

Third, the war in Ukraine has underscored the fragility of world grain markets and the food industry supply chain. The stimulus of additional world demand offers significant opportunities for Latin America. Brazil is one of the most advanced agro-industrial producers, and the region as a whole is already the world’s largest net food-exporting area; by 2030, it is expected to account for 18 percent of global food exports, to include grains, meat, poultry, fish, and fruits.

Fourth, South America is key to fighting rising greenhouse gas emissions worldwide by protecting the Amazon rainforest and widely distributed watersheds. Colombia and Brazil are successfully reducing deforestation after years of losses. The appropriate level of investment in green transformation, climate mitigation, and forest protection and preservation could dramatically impact global warming and regional economic growth—if the $100 billion a year promised by developed countries for fighting climate change in emerging markets materializes. Regional countries met in Belém, Brazil, on August 8–9 to call for greater international assistance with their efforts to fight climate change.

Fifth, Latin America has a more developed service sector than is sometimes realized abroad, with major e-finance and e-commerce companies and governments interested in modernizing their telecommunications and digital infrastructure as well as roads, railways, ports, and airports. These initiatives could be worth hundreds of billions of dollars, generating business for the private sector and greater employment for an increasingly better-educated workforce.

Foreign investors are noticing and moving toward countries where macroeconomic management is stable. Last year was a banner year for foreign direct investment in the region, at more than $220 billion. Brazil led the pack with more Brazil’s radical overhaul this July of its tax structure, long considered one of the most cumbersome globally, should attract even greater flows. While minor compared to total U.S. investment, Chinese companies are also pouring billions into Mexico.

The European Union is revamping its engagement with the region, with Spain—which assumed the EU presidency on July 1—promising 10 billion euros of investment. At the July 17 and 18 EU-hosted summit in Brussels with Latin American leaders, 45 billion euros of potential investment were announced, and there is hope that the long-stalled EU-Mercosur agreement will be concluded this year. German chancellor Olaf Scholz’s January 2023 visit to Brazil, Argentina, and Chile concentrated on renewable energy and lithium production.

As for the United States’ relationship with Mexico, despite the many irritants in the bilateral relationship, the United States-Mexico-Canada Agreement (USMCA) is promising transformations, as the significant work by Ambassador Earl Anthony Wayne points out. The revamped trade agreement has “boosted government-to-government engagement” and, critically, “the three governments recognize that USMCA alone does not provide sufficient support for needed economic collaboration given the breadth of North America’s economic interconnection and the tough global competition.”

The Catch

There is a catch to this promising landscape: the historical ambivalence of Latin American governments toward the private sector and the market-based reforms needed to modernize their economies. The prospects for a change of heart now are not as clear-cut as they should be.

Two analyses in The Economist and the Financial Times help explain why. Chile, for example, is lagging in providing incentives and guarantees for foreign investment in the lithium sector. Mexico’s president shut down the country’s investment promotion agency and has attacked the independence of the country’s respected central bank. Colombia’s president has announced that there will be no further development of the hydrocarbon energy that provides his government with the bulk of its revenues. In Argentina, continuing economic mismanagement may plunge the country into deeper crisis. And in Peru, local communities block further mining investments at a moment of rising global demand for the minerals the country produces. Regional economic integration remains more aspirational than real.

Part of the explanation lies in the legacy of left-wing ideology, which holds sway politically in Latin America unlike anywhere else in the world. As The Economist highlights, “What do these left-wing governments want to do? Broadly, they want bigger government, with more state-owned firms, higher spending, and a greater degree of intervention in the market. They all want to reduce inequality through higher taxes on the rich, bigger welfare systems and more state-funded health care.”

These social objectives would not be out of place in debates on economic policy in much of the world, but it is still necessary to develop policies that can generate the growth to pay for these ambitions. On that score, regional governments could do more. As Shannon O’Neill points out, the global opportunities will not wait forever. Southeast Asia, for instance, is aggressively integrating into new global supply chains in contrast to Latin America. IDB president Goldfajn puts it succinctly: “The region confronts a crossroads that will mark its future.” (Author’s translation.) It remains unclear whether Latin American leaders, consumed as many are by domestic challenges, will seize the moment before it ebbs away.

Implications for U.S. Policy in the Region: Some Progress

The implications of shifting realities in Latin America and globally are significant for U.S. ties to the region. Responding to the challenges and opportunities is another matter.

The region has tended to be on the backburner in U.S. policy calculations outside the prism of the Cold War. After a flurry of initiatives in the 1990s and 2000s, that policy went into a reactive mode. The assumption was that democracy in general would hold; that U.S. preeminence would be sustained; and that those problems that impacted the United States more directly, like irregular migration and drug trafficking, could be managed. As Venezuela and Nicaragua became increasingly undemocratic through the 2010s, and with the exception of opening to Havana under the Obama administration, there was a genuine concern about the fate of hemispheric democracy but also echoes of past Cold War worries about “socialist” states with ties to Russia, Iran, and China.

As noted earlier, the Biden administration came in determined to change the way the United States dealt with Latin America. There was hope that it might succeed: Jorge Castañeda’s op-ed “Biden can Inspire Latin America” in 2021 is a case in point. There was no more talk of reviving the Monroe Doctrine, as former national security advisor John Bolton had suggested during the Trump presidency. The approach to the region would be in terms of “a hemisphere that was secure, middle class and democratic.” Better coordination with the region also offered opportunities to address global U.S. concerns like climate change, supply chains, and the new green economy.

The administration’s proposals for reengagement in the region were presented at the Summit of the Americas hosted by President Biden in June 2022, the first time since the inaugural summit in 1994 that the gathering of hemispheric leaders had taken place on U.S. soil. While it faced threatened and actual boycotts by regional leaders because of the U.S. decision to exclude Cuba, the topline results pointed in a new direction for regional ties.

There was talk about uniting “in a moment when democracy is under assault around the world.” More novel was the emphasis on post-pandemic challenges, with leaders approving “political commitments related to health, climate change, clean energy, digital transformation, and democratic governance.” The agreement with some countries on migration was also breakthrough: until then, the issue had seemed to be largely a U.S. preoccupation.

Skeptics wondered whether these initiatives could be fleshed out. It is legitimate to ask the extent to which there has been follow-through over the past year.

In brief, there has been progress. Vice President Harris’ June 2023 attendance at the U.S.-Caribbean leaders’ summit in the Bahamas committed new funding ($100 million) to energy resiliency, humanitarian assistance, and food security. A summit of Latin American and U.S. cities took place in April 2023 in Denver. The Americas Partnership for Economic Prosperity (APEP) had an initial meeting hosted by Secretary Antony Blinken and U.S. Trade Representative Katherine Tai to discuss growth strategies with the 11 countries who support the initiative. Hundreds of millions of dollars have been programmed for Central America to address migration. Work on deepening the USMCA has continued with a ministerial meeting on July 13.

The Biden administration has also been supportive of Ecuador and Argentina in negotiating IMF agreements to refinance their international debt. It played a helpful diplomatic role in supporting the Brazilian electoral process of 2022, as well as in the aftermath of President Castillo’s ouster in Peru. In Colombia, the United States is working constructively with President Petro to sustain the strong ties between the two countries. There is greater cooperation regionally on migration. General Laura Richardson, who leads Southern Command, has pursued opportunities to deepen defense and security operations in the region, as well as to contain Chinese military expansion.

U.S. Constraints on Regional Policy . . .

The challenges to transforming hemispheric relations, however, remain significant for both Latin America and the United States.

First, as mentioned before, the immigration crisis on U.S. borders overshadows much of the other substantive engagement with countries in Latin America. The irony of former president Trump’s “Remain in Mexico” policy continuing in all but name is not lost on either side of the border. Close partners of the United States like Costa Rica and Colombia are being asked to take on more responsibilities to help quell the flow of migrants to the U.S. border—with less-than-expected financial assistance from Washington as was made clear during the August 29 visit to the White House of Costa Rica’s president. Within the region, many see it as the principal issue Washington is concerned about, because of domestic political pressures.

Second, polarization in Washington, the spillover of geopolitical tensions from Russia’s invasion of Ukraine, and the increasing friction between China and the United States make it easy to frame influence in Latin America as an either/or proposition instead of accepting the complexity of a still globalized world. This approach, as mentioned before, will not work in the region, which leans increasingly toward multi-alignment.

Third, there is an undercurrent in part of Washington that frames the survival of left-wing dictators in Cuba, Nicaragua, and Venezuela as symptomatic of what could develop elsewhere in Latin America. There has not been a full return to President Obama’s relaxation of policy on Cuba. Again, the optic is misplaced. It introduces mistrust in U.S. engagements with regional capitals led by left-wing leaders who are democratically elected. The region also sees the United States maintain ties with repressive governments elsewhere in the world. Continuing to cast the hemisphere as an autocracy versus democracy struggle is losing the United States important opportunities for influence in the region.

Fourth, there are real limitations on the Biden administration’s ability to provide meaningful assistance and policy attention to Latin America. Ukraine is the existential national security issue of our time, making an outsized demand on resources. Domestically, the transformational Inflation Reduction Act and CHIPS and Science Act require a whole-of-government commitment. The implications for foreign policy are evident. National Security Advisor Sullivan’s consequential April 27 speech on the U.S. economy and the world made it clear that the administration’s priority is “to more deeply integrate domestic policy and foreign policy.”

There are consequences, however. The budget for assistance to the region, as previously stated, is under $3 billion. There has been no replenishment of multilateral organizations to help transform Latin American economies or to provide game-changing levels of investment for climate change. There is no sustained high-level dialogue on what nearshoring can mean. There is no money for expanding people-to-people ties. The battle to influence the next generation of Latin American leaders is consequently being lost. Almost half a million students from China and India studied in the United States in 2021–2022, compared to fewer than 15,000 each from Mexico and Brazil.

Fifth, U.S. trade policy globally is now more inward-looking and protectionist, as Robert Zoellick and others have pointed out and as Sullivan reiterated in his speech. That means there is unlikely to be a positive response to requests for free trade agreements from countries like Uruguay and Ecuador. Washington’s response to the new initiative of the Dominican Republic, Panama, and Costa Rica to position themselves as an integrated part of supply chains in North America is still at initial stages. The Americas Partnership for Economic Prosperity (APEP) dialogue, like the Indo-Pacific Economic Framework for Propserity (IPEF), offers little in the way of market concessions. The Americas Act proposed by Congress to promote trade within the region is heavily conditional on how Latin American countries deal with China. They are unlikely to respond.

. . . And Constraints within Latin America

Even if the constraints on U.S. policy were not so evident, realities in Latin America are also contributing to cooling ties.

Heads of state threatening to boycott last year’s Summit of the Americas hosted by a U.S. president personally committed to working with the region was seen as an affront by many in Washington. The signal being sent was a pointed one, rejecting unilateralism by the United States. Among the countries whose heads of state did not appear were Mexico and Central American nations heavily dependent on U.S. trade and remittances.

Mexico, which during the pandemic emerged as a key supply chain relationship for the United States, has yet to fully grasp the historic opportunity to deepen ties as made clear in a recent CSIS report on the country. There are tensions over law enforcement cooperation, energy policy, and trade. President López Obrador has blamed the United States for the fentanyl crisis and immigrant deaths, and has accused the country of intervening in domestic Mexican politics. Rhetoric by U.S. politicians suggesting military intervention in Mexico to combat the fentanyl epidemic does not help. While U.S. ties with Mexico remain strong, the strains are clear.

In Central America, U.S. policy has sought to strengthen governance in Guatemala, El Salvador, and Honduras, as well as to pressure Nicaragua’s dictatorship to change course. U.S. sanctions, restrictions on aid, and targeting of corrupt officials, however, have had little impact. In sharp contrast with the past, these governments have chosen to continue going their own way.

The hopes that the election of President Lula in Brazil would lead to a strengthening of ties with Washington after the contentious Bolsonaro presidency has morphed into tensions over Lula’s comments suggesting the United States was helping fan the war in Ukraine; this is complicated by a major visit to China where Lula made a point of stopping by Huawei installations and by Brazil’s support for the de-dollarization of the world economy. While the relationship remains strong, helped by U.S. support for Brazil’s accession to the Organization for Economic Cooperation and Development and the granting of major non-NATO partner status during the Bolsonaro presidency, the early optimism is less in evidence. A recent Brookings study suggests both countries may need to adjust as Brazil pursues a more global and nonaligned role.

More widely within the region, the long-standing doctrine of noninterference in other countries’ internal affairs has been revived. Most countries have restored full diplomatic ties with Caracas, reversing the historic decision by key Latin American governments to reject the legitimacy of Maduro’s fraudulent 2018 presidential election. Pressure on Maduro to commit to a democratic transition has lessened. There is no action to censure Daniel Ortega in Nicaragua, the worst abuser of human rights in the hemisphere (although Mexico at one point seemed ready to freeze ties with Peru over Castillo’s constitutional removal). Some Latin American presidents advocate for replacing the Organization of American States, which they see as beholden to the United States.

Notwithstanding Russia’s invasion of Ukraine, Latin America—like other regions in the world—is not looking to take sides. No country in the region outside Moscow’s allies in Nicaragua, Cuba, and Venezuela supports Russia, but like India, Turkey, the Gulf states, and other U.S. partners, Latin American countries are not imposing sanctions or passing on economic opportunities that benefit them. If anything, the current international landscape is accentuating the region’s transactional response to global events.

Conclusion

In closing, it is difficult to offer thoughts on how the United States and Latin America can overcome many of these challenges to closer ties in the near term. It would be disingenuous to do so. As the Summit of the Americas made clear, there is widespread recognition of what needs to be done. Without a greater policy and resource commitment from both sides, however, it is unlikely that either the United States or the region can swiftly change course to a more strategic relationship.

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Source link : https://www.csis.org/analysis/inflection-point-challenges-facing-latin-america-and-us-policy-region Author : Publish date : 2023-09-07 03:00:00 Copyright for syndicated content belongs to the linked Source .

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