Historic Transformation and Opportunity Are Undergoing 

As two important regions of the world, the Asia and the Pacific region and Latin America and the Caribbean region started their economic cooperation substantially only long after their respective economic relationship with other regions, especially the western developed countries. The fundamental reason behind that is both regions have long been relatively weak and small in scale economically in the world and most of their external economic relations were dominated by their reliance on the western powers.

However, with the development and rise of economic powers of their own, the two regions have witnessed more and stronger economic relations, mainly speaking, in three periods. The first period is the days when Japan’s economy took off after the Second World War. Japan needed resources to satisfy its export production and its people’s rising life needs, to invest abroad to gain market accesses and find profit opportunities. LAC, as a resource abundant and populous region, was one of main target place of Japan. The second period came as the Four Small Dragons (Republic of Korea, Taiwan China, Hongkong China, and Singapore) emerged in world economy after Japan in the 1970s and 1980s. All of these economies are export oriented and resource-scarce. Their imports from LAC of natural resources pushed the economic relationship between the two regions to a new height. As a matter of fact and also regret, LAC has experienced long time economic stagnation, the so-called Lost Ten Years until the end of 20th century, which rendered LAC only the resource supplier in the bilateral economic relationship with the Asia and the Pacific newly rising economies.

The historic transformation has been looming in as the two biggest developing economies of the world and coincidently in the Asia and Pacific region, China and India, got their real economic prowess at the beginning of the 21st century. The rise of these two developing economic giants not only pushes up the commodity prices which LAC can benefit a lot but also provide many low price but good quality products which can effectively help LAC to deal with the inflation problem, as inflation has long been the headache of many LAC countries. The same important thing needs to be mentioned is that LAC countries have regain their economic growth momentum since the end of the 20th century. Even taken the hit from the Great Financial Crisis since 2008, the two regions still main quite impressive growth, showing the different trajectory compared to the past. As predicted by many international institutions, the Asia and Pacific region will account around 30% of world GDP and LAC’s account will rise to around 10%, and given the strong comparative advantage complementarities existing between the two, the economic cooperation potential is still huge.

There is an opportunity that they can develop their more or less independent economic relationship, not centering the western countries any more. In the past, the west countries were like an economic hub, and the Asia and Pacific region and LAC and other regions of the world were like the far ends of many spokes. As long as the hub had problems, the ends of spokes would have strong difficulties as well. Probably, this is going to change. A more balanced and stable world economy is taking shape. 

Trade between the Asia and the Pacific and LAC: Growing Fast while Imbalanced

The starring fact of trade between the two regions is the fast growth rate. Since 2000 to 2011, the annual growth rate of trade is 20.5%, reaching the amount of 44.2 billion US $ in 2011. Asia and the Pacific’s share of LAC trade has raised to 21%, only after the 34% share of US. Simultaneously, LAC’s share of Asia and the Pacific’s trade grew to 4.4%, more than doubled.

However, there are serious imbalances behind the trade volume surge. The first imbalance is that the relative importance of each other in terms of trade share. Asia and the Pacific’s 21% of LAC trade is in general matching its share of world GDP, which LAC’s 4.4% trade share of Asia and the Pacific still lags quite behind its share of world GDP, roughly 8% now. The second imbalance is that the trade growth between the two regions is mainly dominated by several major economies, China, Japan, Korea and India in Asia and the Pacific, who account almost 90%, while Brazil, Mexico, Chile and Argentina in LAC, who account around 80%. The third imbalance lies in the trade sectors. Currently, the trade between the two regions is still Commodity for Manufacturing pattern. LAC mainly exports a few common commodities, like iron ore, copper, soy, oil, sugar, paper pulp and poultry, which occupies 70% export share to Asia and the Pacific; while later mainly exports various manufacturing products to LAC, including ships, cars, electronics, equipment, and parts and components. Understandably, these imbalances are shaped to some degree by the population and geographic characteristics and structure by the comparative advantages, so there is reasonability behind that. But if the imbalances keep fixed, then many political economic challenges will emerge out, which will disrupt the bilateral economic cooperation.

So how to optimize the trade structure and expand the potential existing? In one hand, LAC can make more efforts to utilize more its advantages in commodities, such as expand its own industrial chain related to commodities, not only export the crude shape of them, which will not only help LAC get more return but also will gradually educate the human resources, expand technologies and practice management skills that the development of industries will require. LAC also needs to pay more attention to construct better infrastructures, which plays key role to any industrial development. In all these regions, the major economies in Asia and the Pacific should be able to provide some experiences.

Both regions also need to take measures to reduce trade cost. The first is to reduce traditional trade barriers, such as tariffs and non-tariffs, which are still high in some sectors for each sides; the second is the transportation cost. This is especially important for LAC countries, as they have advantages in commodities, which sometimes locate in inland region and heavy in weight. Small improvements in transportation will have quite big return of trade opportunities and trade profits.

Currently, there are reasons for us to be optimistic for the trade relations can be further expanded and optimized. The most important reason is both regions are indeed complementary according to their natural endowment structure. The Invisible Hand will push the trade relations forward; the second important reason is that there is still big room for policy coordination. Since 2004 to 2011, there were two new FTAs reached every year between the Asia and the Pacific and LAC, reaching 22 in 2012. There are 8 FTAs undergoing negotiation and the other 11 have been proposed. If they can be successfully concluded, there would be 30 FTAs between the two regions, which for sure will reduce various trade barriers and create new potentials to tap each other’s trade advantages.

Investment between the Asia and the Pacific and LAC: Newly Mobilized, but Lagging behind Trade

Investment usually follows the growth of trade, as two sides have better knowledge over each other and trade creates needs of investment. FDI can also be useful to relieve the trade imbalances by jumping trade barriers and create new advantages by combing capital, technologies, management skills and local endowments together. But to the deepest logic, investment is driven still by the complementarities between different parties; otherwise companies would not bother to go abroad.

If making a comparison between trade and investment between the Asia and Pacific region and LAC, we can find that although investment has grown quite fast recently, it still lags far behind trade, especially the case of LAC’s investment in the Asia and Pacific. The Asia and the Pacific’s investment in LAC have grown fast since 2004. China is an investment star in LAC in recent years. Before 2004, China’s investment was close to zero, but its direct investment in LAC reached 15 billion US dollars in 2010, accounting 9% of the total FDI that LAC has attracted, after only the United States (17%) and the Netherlands (13%). In 2011, China’s direct investment in LAC is 11.9 billion US dollars. Its FDI stock in LAC has reached 55 billion US dollars, accounting 13% share of the total outward direct investment stock of China. More than 90% of China’s direct investment in LAC is concentrated in natural resources. Brazil and Argentina are the two largest destination of China’s investment, in 2010, respectively accounted 63% and 39%. Korea and Japan still keep strong interests to invest in LAC region. Since 2000, Korea’s direct investment in LAC grew at an average annual rate of 103%, and totaled close to US $ 5 billion over the past decade. Japan invested 6.7 billion US dollars in LAC, reaching its all time high. However, LAC’s investment in main Asia and Pacific economies, such as China, Japan and Korea, only accounts even less than 1 percentage of the FDI stock, while its share of the regions trade is almost 5.3%. From the perspective of investment volume, LAC lags quite much behind its trade relationship with the Asia and Pacific region.

In terms of destination of direct investment, Brazil, Mexico and Argentina are the main targets for Asia and Pacific countries; while China, India are the two major target countries for LAC investors. Korea and Japan are interested to invest in manufacturing sectors in LAC, to get access to local markets and use LAC as one stepping stone for the United States. China’s investment was mainly for satisfying its own resource supply. LAC investors mainly invest in service sectors in Asia and Pacific region.

Both of the regions need make more effort to promote the bilateral investment development At first, they need manage to reduce the cost of collecting useful market information for each other, which includes encourage the transparency of institutions, more exchange of cultural and people-to-people activities, better cooperation in education and business training areas. The second both need create more benign commercial environment, such as less restrictions, stable and transparent regulation system and etc. The third, both sides also can promote investment through negotiation on Investment Chapters in FTAs and BITs, and unilateral liberalization of the investment regime could also be suitable choices for those major economies in the two regions. The fourth, both sides can promote some flagship investment projects, to give political and psychological momentum.

Currently, in all of the FTAs between the Asia and the Pacific and LAC countries, only except 3, there are chapters on investment. The number of BITs has doubled since 1990s, rising to around 40. The major economies also achieved quite much in terms of investment regime liberalization. But in general, there is still big potential to tap.

The Channels to cooperate: from bilateral, plurilateral to multilateral

As mentioned above, trade and investment activities mainly are market-driven and usually come ahead of government coordination. At the early stages, the market can play by themselves. While as the volume growing and extent getting deeper, the market will find rules are not good or efficient enough for them to go well and grow larger. There will be many disputes and political economic problems emerging as well. All of these issues require the cooperation among governments to provide public goods in business area and even beyond to ensure the decent performance and growth of trade and investment.

For the Asia and the Pacific and LAC, there are mainly three channels, while they have not been sufficiently and effectively constructed or utilized. The first and the earliest channel is a trans-regional cooperation mechanism or plurilateral institution, i.e. APEC. In 1993, 1994 and 1998, Mexico, Chile and Peru respectively joined this institution. But as well known for many people, APEC has lost its momentum after the end of last century when the US turned its focus on security issues rather than promoting technology cooperation. Besides, LAC has not interacted with APEC as a united region, so its importance is limited. This means APEC cannot be the effective way for the Asia and the Pacific and LAC to cooperate. There is another interregional mechanism called FEALAC (Forum for East Asia and Latin America Cooperation), which was created in 2001. However, although FEALAC has broad membership, it has no very specific implementation mechanism to push real outcomes, which leads it to very limited recognition in two regions.

The second channel is bilateral agreements between the economies in the two regions, such as FTAs and BITs. To forge FTAs and BITs with each other is one important strategy for many major economies in the two regions, such as Korea, Japan, China, India in Asia and the Pacific, while Chile, Peru in LAC. These agreements effectively addressed the shortcomings of APEC in slow progress in trade and investment liberalization, weak momentum and constrain force. However, Brazil and Argentina, the two large economies in LAC, have not reached significant bilateral agreements with major economies in the Asia and the Pacific region yet. The third channel is multilateral forums, such as UN, G20 and WTO, etc. The two regions have many cooperation actions in terms of many global issues, especially for the developing member economies. But we also need to admit that this type of cooperation in multilateral forums are more fragmented than unified or coordinated, and it cannot have very immediate and specific effect in solving many challenges and problems the economies of the two regions are facing.

We would expect the two regions can input more resources to the interregional FEALAC, or a smaller version of it, such as a cooperation forum between LAC and major Asia and Pacific developing economies. As participant number gets fewer, the efficiency can be stronger. And because the economic growth will mainly come from them, their economic cooperation would be more important.

Looking into the future, we keep optimistic for the two regions’ cooperation. China, India, Korea and Brazil are becoming increasingly important development donors, they can and should have more cooperation on how to help other developing members. Both of the Asia and the Pacific and LAC are mainly developing countries, but in different stages, they can share and exchange their own experiences and lessons in economic and social development. They also need cooperate to promote multilateral trade and investment agenda, to safeguard the interests of developing countries in areas like international financial regulations, international monetary stability, governance of global economic institutions and climate change, etc. the last but not the least, the two regions should commit to mutual beneficial and common prosperity direction, the new way of south-south cooperation, while avoiding the unsustainable model of unilateral dependence of developing countries on developed countries in the past.

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[1] To note: this article is just a brief summary review of the Asia and the Pacific – LAC economic cooperation in order to provide a quick background for dialogue between SIIS and CARI video dialogue rather than for academic purpose. It is based on many research results of ECLAC, ADB and etc. so please do not quote. The data in this article mainly come from various publications of ECLAC, China’s Statistics Bureau, ADB and IDB.

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